Updated on 21 May 2015.
In a nutshell, to prevent people from avoiding inheritance tax by giving all their money away before they die. This doesn't mean you can't make a gift of money at all, but the tax system is designed to ensure that you are not able to give away large sums of money (either in one go, or through smaller, regular gifts) without paying tax.
Inheritance tax is paid on someone's estate (i.e. money they had in the bank, property they owned etc) when they die. Inheritance tax is only payable on any portion of that estate that is above a threshold of £325,000, and is charged at 40%.
In effect, the estate of the deceased pays the tax. In other words, inheritance tax is assessed and paid out of the whole estate, with the beneficiaries of any Will getting their share of the estate after tax.
No, there are a number of exceptions that enable gifts of money to be given, without tax being liable. Those exceptions break down according to who the money is given to, why it is given, the total amount you give away each year and how long you live after giving money away as a gift. They break down as follows:
You can give as much money as you like to certain people and organisations without paying Inheritance Tax (this applies whether you give money whilst living or after you death, via your will). Exempt beneficiaries include:
NOTE that gifts to unmarried partners or unregistered civil partners are not exempt from Inheritance Tax.
You are allowed to give away a total of £3,000 each year, without any tax implications after your death.
Bear in mind that this is the total annual amount that you can give away, NOT a total amount you can give to each beneficiary, each year.
It is also worth noting that your Annual Exemption can be carried forward for one year if it has not been used. In other words, if you did not make any gifts of money during last year, you can give away a total of £6,000 this year. Equally, if you gave away £1,500 last year, you'll be able to give away a total of £4,500 this year.
The Annual Exemption cannot be carried forward by more than one year.
In addition to the exemptions above, you can give away small gifts - not more than £250 - to as many people as you like in one tax year.
However, some points to remember include:
Provided that you give or promise to give a cash gift on or shortly before the ceremony you can make quite large cash gifts as wedding or civil partnership presents, without being liable for Inheritance Tax. The limits on such gifts depend on your relationship with the recipient:
Remember however that, if the wedding or civil partnership is called off and you still give the gift, it will NOT be exempt from Inheritance Tax.
Any gifts that are part of your normal expenditure, are exempt - provided they are made from your after tax income (not your savings) and that you have enough money left over to maintain your lifestyle. These exempt payments include:
Yes, though this rule really only makes a practical difference for the elderly and people who are terminally or seriously ill. That is, any gift given more than seven years before your death is automatically exempt from Inheritance Tax. In addition, any gift given between three and seven years before your death will be liable for Inheritance Tax at a reduced rate - this is known as 'Taper Relief'.
If a gift is given less than seven years before the death of the 'giver', the tax depends on the value of the gift, and there are two possible scenarios:
Remember that these rules only apply to gifts not covered by the exemptions already described above.
Written by Hannah at money.co.uk
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