Some simple ways to give gifts free of inheritance tax - Adelle Seaton

Succession planning can seem like something that other people do, something complex and expensive, reserved for the very wealthy to reduce the amount of inheritance tax that they pay. Whilst it is true that mitigating tax is a motive for some, in practice, the most common objective for people seeking succession planning advice is to ensure that their family is taken care of. There are some simple ways to achieve this that everyone, regardless of wealth, can use to make gifts to their loved ones both during their life and after their death, and they also happen to be inheritance tax-free.

Annual exemption

It is worth considering that a person must live for seven years after making a gift before it can be completely ignored for inheritance tax purposes. However, every person has an allowance of £3,000 that they can give away each tax year that is immediately free of inheritance tax. Furthermore, if you do not use your allowance it can be carried forward, once, to the next tax year giving a maximum allowance of £6,000. The allowance is per person gifting, not per person receiving the gift and so, if you wanted to make gifts to two people, using only your allowance (and had no rolled forward allowance) you could give them £1,500 each. The allowance is applied chronologically, with gifts made earliest in the tax year benefitting first.

Small gifts allowance

Adelle Seaton is a Senior Associate, Turcan Connell

Gifts that do not exceed £250 are also immediately exempt from inheritance tax. You can gift £250 to as many separate individuals as you wish. The small gift exemption cannot be combined with the annual exemption so you cannot give, say, £3,250 to an individual and claim £3,000 as the annual exemption and £250 as a small gift.

Gifts in consideration of marriage or civil partnership

Each parent can gift up to £5,000 to their child on their marriage or civil partnership which is immediately exempt from inheritance tax. Similarly, each grandparent can make an exempt gift of up to £2,500. Wedding gifts made by other relatives or friends are also exempt up to the value of £1,000 per person gifting.

Gifts between spouses or civil partners

Gifts between spouses and civil partners, of any value, are exempt from inheritance tax so long as both people are domiciled in the UK. If one person is domiciled in the UK and one is domiciled elsewhere there are limits on the amount that is exempt and expert advice should be sought.

Gifts to charity

Positively, gifts made to charities registered in the UK and certain EU charities are exempt from inheritance tax, no matter the value.

Regular gifts from income

As inheritance tax is a tax on assets and capital, the inheritance tax legislation provides an exemption for gifts made from surplus income in a tax year. Where there is surplus income, this can be a very effective way of making exempt gifts, preventing the income accumulating within your estates and being subject to inheritance tax in the future. There are conditions here however. In order to qualify for this exemption, the gifts must meet the following criteria:

the gift must be part of your normal expenditure pattern; taking one tax year with another, the gift must be made from your income (e.g. wages, pension, dividends); and after the gift, you must have sufficient income remaining to maintain your normal standard of living.

To determine if you have surplus income requires all of your expenditure over the tax year to be less than your income that tax year. Gifts made from surplus income are not reported to HM Revenue & Customs annually. Instead, any such gifts made in the seven years before a person’s death are reported in an inheritance tax return after death. It is therefore important that detailed records of the gifts made and your annual income and expenditure are kept.

Whether you gift regularly or to recognise special occasions, give smaller amounts or larger sums, being mindful of the available inheritance tax allowances and exemptions, and keeping good records, is an easy and cost-effective way to benefit your loved ones and chosen charities now and in the future.

Adelle Seaton is a Senior Associate, Turcan Connell.