As property values have risen over the years many people who previously did not have to consider Inheritance Tax are now finding themselves in that position.
For those with larger estates it is easier as the rules around gifting favour them, but it is not so easy for those with smaller estates who still need to do some planning. The gifting rules let someone with hundreds of thousands of pounds to give away, takes advantage of the tax breaks that become more generous with the length of time between the date of the gift and the time they die, while those who can only afford to make smaller gifts must live seven years to get any advantage from their gifts.
Everybody has an annual allowance of £3,000 which they can give away. This can be given to one person or divided up for example: £1,000 to each of three children. This gifting does not count towards the estate for Inheritance Tax purposes. There are other allowances such as for birthdays, Christmas and weddings. Larger gifts that are made are known as Potentially Exempt Transfers or PETs. When a PET is made if the person making the gift lives seven years from the date of making the gift then it falls out of their estate. This is all well and good if you survive the seven years, but what happens if you don’t?
When you die, the gifts that you have given away in the last seven years are added up and use up the available nil rate band first (currently £325,000). This then reduces the amount of nil rate band available for the rest of the estate. For those who have gifted over £325,000 however and lived between 3 and seven years there is something called taper relief.
If you die within three years of making a gift then tax is payable at the full 40% on the amount
Gifted over £325,000, however the effective tax rate for deaths after three to four years is 32% then 24% then 16% then 8% for each following year. This taper relief however only helps the wealthy as the gifting must be in excess of £325,000 to qualify for taper relief and not many people have that much available to gift away.
There are other ways in which to gift money without it being clawed back into your estate when you die. For all Inheritance Tax issues the best thing to do is seek advice, particularly when considering gifting.
How we can help
Contact: Laura Stansfield, Sue Darlington or Susanne Furness in our Wills, Probate & Planning for the Future department to discuss how one of our team of experts can help guide you through this process.
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