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Article by Editorial | 24th May 2019

Inheritance Tax – Who Really Gains?

Making financial gifts to your family and friends while you are still alive is not only rewarding but also tax efficient. Here we look at the inheritance tax rules.

None of us like talking about death but it’s important that we plan ahead to protect assets and ensure loved ones are looked after according to wishes. Making financial gifts to your family and friends while you are still alive is not only rewarding but also tax efficient. Here we look at the Inheritance Tax rules that dictate what you can and cannot do to help you plan during your lifetime – and beyond.

What is Inheritance Tax?

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who has died. There’s normally no Inheritance Tax to pay if either:

• The value of your estate is below the £325,000 threshold.

• You leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club.

• If the estate’s value is below the threshold you’ll still need to report it to HMRC (HM Revenue & Customs).

• If you give away your home to your children (including adopted, foster or step) or grandchildren your threshold can increase to £450,000.

• If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £900,000.

Inheritance Tax rates

The standard Inheritance Tax rate is 40% and it is only charged on the part of your estate that’s above the threshold. The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your Will.

It’s important to note, that some gifts you give while you’re alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.

Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.

Giving gifts

There’s normally no Inheritance Tax to pay if you move out and live for another seven years. If you die within seven years of giving away all or part of your property, your home will be treated as a gift and the seven-year rule applies.

• There is usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’. There’s also no Inheritance Tax to pay on gifts between spouses or civil partners – you can give them as much as you like during your lifetime, as long as they live in the UK permanently.

• People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the seven years before your death.

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