Britons may legally reduce inheritance tax through gifts

Inheritance tax labelled ‘unfair’ and ‘cruel’ by expert

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Under the current inheritance tax rules, Britons pay a tax of 40 percent on the value of an estate, which is property, money and possessions, when someone dies.  People pay the levy if the estate is worth above the current nil-rate band allowance which is £325,000 and they don’t have to pay if it is below this. As the Government plans to keep the threshold frozen until 2026, financial experts warn that more and more families are to be drawn into paying the tax even though it was meant to only affect the wealthy. 

The reasons for the increase in Britons having to pay the tax have been put down to the continuing booming property prices amid the freeze which has now been made worse with rising inflation. 

Alex Davies, CEO and founder of Wealth Club said: “The new prime minister has stated that she would review inheritance tax rules if she came into power, however, it’s hard to imagine inheritance tax is top of the to-do list. 

“The good news however is that there are already several perfectly legitimate and sensible ways to reduce the amount of inheritance tax your family might have to pay on your death. It is for this reason that inheritance tax in some circles is referred to as a ‘voluntary tax’.”

Considered one of the easiest ways a person can reduce their inheritance tax liability when they die, is by gifting whilst they are still alive. 

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According to the rules, all adults can give away a maximum of £3,000 every year without paying tax on it. This is known as a person’s “annual exemption”.

The £3,000 can be given to just one person or it can be split between several.

People are also able to carry over their unused annual exemption to the next tax year however this is only for one tax year.

Couples can combine their allowances meaning they can give away £6,000 without paying tax.

Britons can give as many gifts of up to £250 per person as they want each tax year, as long as the person receiving it has not benefited from gifts within the £3,000 limit.

Birthday and Christmas gifts which are given from a person’s regular income are also exempt from inheritance tax.

Parents can give their children £5,000 if they are getting married and can give £2,500 to a grandchild or great-grandchild.

They can also give a gift of up to £1,000 to another relative or friend.

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People can also make regular payments to help with another person’s living costs, known as “normal expenditure out of income” however, this gifting can’t affect a person’s own standard of living.

For the exemption to apply, the person must demonstrate a “regular pattern of giving over a reasonable period of time”.

With larger gifts, the ones that are above someone’s annual gifting allowance, people will need to be aware of the seven-year rule.

If a person has exceeded their allowance by the time they die, the gift will only be free of inheritance tax if the person gifting survived more than seven years after making it.

Gifts given in the three years before the death are taxed at the full 40 percent. 

Anything given three to seven years before the death is then taxed on a sliding scale known as “taper relief”. 

Gifts given in the three years before death would be taxed at 40 percent and gifts given between three to four years will be taxed at a rate of 32 percent.

Between four to five years, the gift will be taxed at a rate of 24 percent and if the person dies between five to six years after the gift it will be taxed at 16 percent and between six to seven years it will be taxed at eight percent.

Britons are also warned about “gifts with reservation”. These are where a person makes a gift but “reserves a benefit” from it.

If something is classed as a gift with reservation then it will be included in the value of a person’s estate and tax will be paid on it regardless of how long someone lives after it is gifted. 

Financial experts often urge Britons to plan accordingly when it comes to their death and state that people should start their planning by making a will.

Mr Davies added: “Making a will is the first step you should take. Without it, your estate will be shared according to a set of pre-determined rules and means the taxman might end up with more than its fair share.”

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