Who pays Inheritance Tax on gifts? Why timing of gift can have a big impact on tax charged
Inheritance Tax may be required to be paid on a deceased person’s estate - such as property, money and possessions. The standard Inheritance Tax rate is 40 percent. This rate applies above a threshold, however there may be some instances where an estate which has a value greater than the threshold but Inheritance Tax is not payable.
For instance, there is usually no Inheritance Tax to pay if everything above the threshold is left to one’s spouse, civil partner, a charity, or a community amateur sports club.There are ways in which a person may be able to increase their threshold - and this can be up to a maximum of £950,000.Some gifts which are given during a person’s lifetime may be taxed after their death.There are certain reliefs, such as Business Relief, which allows some assets to be passed on without Inheritance Tax being payable, or with a reduced tax bill.Small gifts such as Christmas or birthday presents which are made out of normal income are usually not subject to Inheritance Tax, and they are known as “exempted gifts”.There is no Inheritance Tax to pay between spouses or civil partners, meaning one can give them as much as they like during their lifetime, provided they live in the UK permanently.
What are exempted gifts?In each tax year, a person can give away £3,000 worth of gifts without them being added to the value of one’s estate, and this is known as the “annual exemption”.Any annual exemption which goes unused can be carried forward to the following year - but only for one year.In the same tax year, a person can also give away wedding or civil ceremony gifts worth up to £1,000 per person - or £2,500 for a grandchild or great-grandchild, and £5,000 for a child.In addition to the aforementioned normal gifts, one can also make payments to help with another’s living costs, or give away gifts to charities and political parties.A person may also give up to £250 in gifts per person to as many people as they want in a tax year, as long as they haven’t used another exemption on the same person.
The seven year ruleIf there is Inheritance Tax to pay, then it’s charged at 40 percent on gifts which have been given in the three years prior to death.However, timing of a gift can have an impact on Inheritance Tax that is paid, due to a sliding scale of Inheritance Tax rates on gifts made between three and seven years before death.The rate reduces from 40 percent to 32 percent if a gift was given between three to four years before death.Should it have been given in the four to five years before death band, the rate is 24 percent.This drops to 16 percent for the five to six year band, and eight percent for the six to seven year band.