If your assets are worth more than the Inheritance Tax (IHT) allowance (currently £325,000) your estate will be taxed when you die at a rate of 40% on the value of your assets over the allowance (unless you leave your assets to an exempt person or body, such as your spouse or a charity).
An easy way to reduce your IHT is to reduce the value of your estate by giving away the assets that you no longer need. However, simply giving something away does not immediately remove its value from your estate. The usual rule is that you need to live for another seven years before the gift is free of IHT.
However if certain conditions are met it is possible to make gifts which will be immediately exempt from IHT. In other words, if you died the day after you made the gift no IHT would be payable on the gift.
One example is gifts made from your income if you receive more income than you need for your day to day living. This is a particularly useful exemption because there is no limit on the amount of income that you can give away. In order to get the exemption, you need to make regular gifts out of your income to the same people. For example, annual or monthly gifts to your children. You must also be able to maintain the same lifestyle after making the gifts, without having to spend your capital.
Other examples include certain wedding gifts, any number of small gifts of up to £250 (to different people) and other capital gifts not exceeding £3,000 in total per tax year.
To ensure the exemptions can be claimed, you need to keep a record of the gifts you make and comply with the relevant rules. Please contact us if you would like help with taking advantage of these useful exemptions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.