Inheritance Tax is paid if a person’s estate (their property, money and possessions) is worth more than £325,000 when they die. Currently charged at a rate of 40 per cent, an inheritance tax bill on a large estate can run into tens or even hundreds of thousands of pounds.
However, there are ways of reducing your inheritance tax liability by making gifts while you are alive. In the next part of our series ‘52 Ways to Save Tax’ we look how you can pay less tax by giving money away. Keep reading to find out more.
52 Ways to Save Tax – Part 11: Give money away
There are several ways of making gifts and reducing your potential tax bill. These include:
Giving small gifts
In each tax year, you can gift up to £250 to as many people as you like, completely free of Inheritance Tax. Wedding gifts and individual gifts up to this amount can be given to as many different people as you wish.
Remember that you can’t give a larger sum of money and claim exemption for the first £250.
Give up to £3,000 every year
As well as the individual £250 gift limit you can also give away £3,000 in total each tax year – although you can’t combine these two allowances with gifts to the same person.
The estate won’t pay any Inheritance Tax on up to £3,000 worth of gifts given away by the deceased in each tax year (6 April to 5 April). This is called your ‘annual exemption’.
If you don’t use your annual exemption you can carry it over into the next tax year, but the maximum exemption is £6,000.
Give a wedding gift
Wedding or civil partnership ceremony gifts are also exempt from inheritance tax – although there are limits to this:
- Parents can each give cash or gifts worth up to £5,000
- Grandparents and great grandparents can each give cash or gifts worth up to £2,500
- Anyone else can give cash or gifts worth £1,000
In order to qualify for this exemption you will need to give this gift (or promise to give it) on or shortly before the date of the wedding or civil partnership ceremony.
Give regular gifts from your income
There is no Inheritance Tax to pay on gifts from the deceased’s income (after they paid tax) as long as they had enough money to maintain their normal lifestyle. Such gifts may include:
- Christmas, birthday and wedding/civil partnership anniversary presents
- Life insurance policy premiums
- Regular payments into a savings account
Give a gift to charity or a political party
Gifts to UK charities are also tax-free. The deceased person’s estate will pay Inheritance Tax on gifts to charities, museums, universities or community amateur sports clubs.
In addition, there is no Inheritance Tax to pay on a gift to a political party as long as they have either:
- 2 members elected to the House of Commons
- 1 member elected to the House of Commons and received at least 150,000 votes in a general election