What is inheritance tax?
Inheritance tax is a tax that may be payable from your estate when you die. Everyone has a tax-free allowance, for inheritance tax purposes, and that allowance is known as the nil rate band. The nil rate band is currently £325,000. If your estate is worth less than £325,000 at the time of your death, then there will be no inheritance tax to pay.
Understanding the 7 year rule
When valuing your estate for inheritance tax purposes, the value of any gifts that you have made in the 7 years preceding your death, that are not covered by an allowance or exemption, will be added to the value of the assets you own at the time of your death to produce the estate’s value. If the value of your assets and the total of the gifts when added together exceed £325,000 then your estate may be taxable. Generally, there will be no tax due on a gift you have made if you live for 7 years after making it.
What is classed as a gift?
A gift is made whenever you make a gift and your estate’s value is reduced. For example, giving away a piece of jewellery or buying a friend or relative something is a gift that reduces the value of your estate. Paying for a family holiday is also another common example of a gift.
Not every gift made in the 7 years preceding your death will be added to the value of your estate when you die. Everyone has an annual exemption of £3,000 enabling you to make gifts totalling up to £3,000 per tax year without them having to be considered when valuing your estate for inheritance tax purposes.
There is also a small gifts exemption which ensures gifts not exceeding £250 in total value made to an individual in any one tax year are exempt.
Gifts that can be shown to be normal expenditure out of income, that leave you with enough income to maintain your lifestyle, will also be covered by an exemption.
What is taper relief?
There is a common misunderstanding that if someone has made gifts within the 7 years preceding their death, and the estate is taxable, the recipients of the gifts must pay inheritance tax. The nil rate band is first applied to any gifts and then any remaining nil rate band is applied to the value of the estate’s assets. Recipients of gifts made in lifetime will only be expected to pay inheritance tax on the sum they have received if the total of the gifts made in the relevant period exceeds the available nil rate band, after considering any exemptions.
If tax is due on the gift, then taper relief may apply. Taper relief acts to reduce the tax which would otherwise be payable on the gift if the gift has been made 3 years or more before your death. The amount of taper relief depends on how long before the deceased died, they made the gift.
Who pays the inheritance tax on gifts?
Should inheritance tax be payable on a lifetime gift then it is for the recipient of the gift to pay the tax unless your Will states otherwise.
How can we help?
We have a team of colleagues that would be happy to provide advice regarding lifetime gifts and inheritance tax.