Recent research conducted on behalf of HMRC found that over a quarter of the population have made gifts of at least £1,000 during their lifetime, with nearly a quarter of people aged 70 and over having made a gift in the two years prior to being surveyed. Gifts can include property, possessions, money or paying money/fees to a third party for the benefit of another person, for example paying for someone else’s education, care fees or housing. Gifts can be made to individuals, trusts, charities or other organisations. Although many people are making gifts, the research found that fewer than half of people who made gifts were aware of the inheritance tax rules and exemptions surrounding those gifts.
Many people have heard of ‘the 7 year rule’ in relation to gifts and inheritance tax. If a person makes a gift, and then dies within 7 years of making that gift (and the gift does not come under any exemption) then the value of the gift is added to the person’s estate when calculating any inheritance tax due on their death. For some people, this may not make a difference, as their estate may still be under the inheritance tax threshold or otherwise exempt from inheritance tax. For others, it may result in inheritance tax being payable. If a person survives for at least 3 years after having made a gift, then only part of the value of the gift is brought back into account on death. This is based on how many years have passed since the gift was made - the closer to 7 years, the lower the amount that is brought back into account. This is known as ‘taper relief’.
Often, gifts are exempt from any inheritance tax consequences immediately, and the 7 year rule does not need to be considered. Below is a brief outline of some of the more commonly used inheritance tax exemptions applicable to gifts:
It may therefore be the case that you can make more gifts than you realised, when the relevant exemptions are taken into account, although advice specific to your individual circumstances should be obtained. If you are considering making gifts, whether this is with inheritance tax in mind or not, then you should think carefully about the asset(s) you are wanting to give away, the recipient of the gift(s) and also the potential tax consequences of the gift(s).
If you would like advice about gifts and your inheritance tax position then please contact us today and speak to the Wills and Probate team.