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Gifts and Inheritance Tax – Key points for estate planning

Inheritance Tax (IHT) is not only applicable to the assets and possessions of someone who has passed away but also to the gifts they gave during their lifetime. Understanding the tax implications of gifts given before death is essential in estate planning. Recent data shows a growing trend of families distributing assets before death to lessen IHT implications, with a 48 per cent increase in the last decade according to HM Revenue & Customs (HMRC) data.

Who is responsible for IHT on gifts?

Usually, the IHT on gifts is covered by the deceased’s estate. However, if gifts exceeding £325,000 were given in the seven years before death, the recipient might be responsible for the tax.

Gift Categories and IHT

Government guidelines state that the following assets are subject to IHT:

  • Money
  • Physical items such as jewellery and furniture
  • Property including land and houses
  • Shares on the London Stock Exchange
  • Unlisted shares held for less than two years before death
  • IHT Exemptions

Gifts between spouses and civil partners, customary gifts, and donations to charities and political organisations are generally exempt from IHT.

Gift Allowances

Individuals have a yearly non-taxable allowance of £3,000, which can be carried over to the next year. Separate allowances exist for small gifts and wedding gifts.

Understanding the seven-year rule and taper relief

If the gifts given by the deceased total more than £325,000, then the gifts given in excess of this have different tax rates depending on the time between the gift and their death. The rates are as follows:

  • 0-3 years – 40 per cent
  • 3-4 years – 32 per cent
  • 4-5 years – 24 per cent
  • 5-6 years – 16 per cent
  • 6-7 years – 8 per cent
  • Over 7 years – Tax-free

If death occurs within seven years of giving the gift, taper relief gradually reduces the IHT due.

In-depth Considerations for Estate Planning

When planning your estate, consider the following:

Strategic Gifting: Utilise the seven-year rule to potentially reduce IHT liability through early and structured gifting.

Record Keeping: Maintain detailed records of all gifts given to facilitate the executor’s role in determining potential IHT liabilities.

Gift Reservations: Be aware that gifting a home but continuing to reside in it will still incur IHT.

Maximising Allowances: Leverage annual and wedding gift allowances to their fullest extent in your estate planning.

Spousal Exemptions: Assets transferred to a surviving spouse or civil partner are usually exempt from IHT, deferring the liability until the second partner’s death.

Life Insurance: Consider life insurance policies to cover potential IHT liabilities, helping to preserve the estate’s value for beneficiaries.

Trust Establishment: Utilise trusts to manage assets effectively and potentially reduce IHT implications.

Regular Reviews: Regularly update your Wills and estate plans to align with current tax strategies and personal circumstances.

Seeking Professional Advice: Engage with experts for personalised advice to manage your estate tax-efficiently while honouring your wishes.

Avoiding Conflicts: Ensure clarity in your Will to prevent potential conflicts among beneficiaries, promoting clear communication and preventing legal issues.

A professional legal team can aid in managing your estate in a tax-efficient manner while respecting your wishes. Please contact us today for more guidance from our expert team of solicitors.

Rachel Blackburn

Head of Wills, Probate and Older Client Services

I joined Mander Hadley’s Wills, Probate and Older Client Services Team in 2018.I specialise in the preparation of Wills, Probate and estate administration, trusts and trust administration and Lasting Powers of Attorney. I also have experience of care fee planning and appeals of Continuing Health Care decisions.

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