Inheritance tax: The coal in your Christmas stocking
What is inheritance tax?
Quite simply, it is a tax on a person’s assets when they die. It can also be applied to the recipient of a gift that costs over a certain amount and the giver has then died within seven years. The gift does not have to be monetary; it could also be property or possessions.
What’s the limit?
Per tax year, a person is able to give away a cumulative total of £3,000 to whoever they choose. They can also give as many small gifts under £250 to different people as they like.
What’s the seven-year-rule?
The seven-year-rule becomes relevant when a person gives away over £3,000 in one tax year. It states that the giver must survive for seven years after the gift for it to be exempt from inheritance tax. If not, the value of the gift is counted back into their estate when calculating the inheritance tax due. Such gifts will use up the tax-free allowance (nil rate band) available on their death and, if the value exceeds this, the recipient is liable to pay inheritance tax. However, the tax payable does start to taper if it has been more than three years since the date of the gift.
Are there any gifts that are exempt?
Donations to charity and some gifts for marriages or civil partnerships are not liable for inheritance tax, depending on how closely related a person is to the happy couple. All gifts between married couples or those in civil partners are also exempt.
Is there a way to avoid inheritance tax for certain?
Unfortunately, unless a person is psychic, there is no sure-fire way to avoid inheritance tax on gifts over £3,000.
Nevertheless, there is the option of using ‘excess income’. If a person can prove their income meets all their living costs, and that their standard of living can be maintained after the gift, then it may be possible to claim an exemption for inheritance tax. However, to qualify, there must be a regular pattern to this gifting.
All this being said, as long as the giver communicates effectively with the recipient about the potential risks of an expensive gift, generosity does not need to be feared. If in doubt, seek advice from an expert.
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