Everyone benefits from a £325,000 inheritance tax free allowance and may also receive an additional inheritance tax allowance of £175,000 to apply to the family home in certain circumstances. The standard inheritance rate is 40% and is charged on the part of your estate above the thresholds. If you’re married or in a civil partnership the assets you leave to your spouse will be transferred without any inheritance tax to pay. However, the estate of the surviving spouse will subsequently become subject to inheritance tax. 

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If your estate has an inheritance tax liability your beneficiaries will have to pay the inheritance tax bill but are you aware there are things you can do in your lifetime to potentially reduce this bill?

Take Advantage of Exemptions…

The following gifts are always immediately outside of your estate: 

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Annual Gift Exemption - HMRC gives you an annual gifting allowance of £3,000 every year. This is called the ‘annual exemption’. If you don’t use your full £3,000 annual exemption in one year, you can ‘carry over’ the remainder and use it the following year. However, you can only use this carry-over for one year. 

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Small Gifts Exemption - You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. Wedding gifts are also free from Inheritance Tax, provided you keep to certain limits. You can make a wedding gift of up to £5,000 for your child, up to £2,500 for your grandchild or great grandchild or up to £1,000 to anyone else. 

Gifts to Charity – Inheritance tax will not be paid on gifts made to charities, national museums, universities, the National Trust, political parties and some other institutions such as housing associations. 

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Normal Expenditure out of Income Exemption - Allows individuals to make regular gifts from surplus income without incurring inheritance tax. There is no monetary limit to this exemption so the size of the exempt gift is only limited by the amount of your surplus income. To qualify for the exemption, the gifts must: 

• form part of normal expenditure (a regular pattern of gifting) 

• be made out of income, not capital 

• leave you with sufficient income to maintain your usual standard of living 

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Make Outright Gifts… 

If you can afford to make gifts (above the aforementioned gifting exemptions) you can potentially significantly reduce the amount of IHT payable on your estate. 

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Gifts to an Individual – The most common type of lifetime gift is an outright gift to an individual, referred to as a Potentially Exempt Transfers or PET. A PET typically becomes free from inheritance tax provided the person making the gift survives for 7 years after making the gift. In the event the person who made the gift passes away within the seven year period, the value of the gift when made becomes chargeable and will be included in the estate’s valuation to calculate any IHT liability. The person receiving the gift will have to pay any inheritance tax due. 

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Gifts Into Trust - A trust is a legal arrangement where you give cash, property or investments to someone else so they can look after them for the benefit of a third person. In other words, when the property is held in trust, it will potentially be outside your estate for Inheritance Tax purposes. In addition, trusts can be used to make sure that assets are given to beneficiaries in a timely and controlled manner and in line with your personal wishes. The big advantage of Trusts is that you, as the ‘settlor’ can maintain control of how, and when, the money is used, which is particularly important where young beneficiaries are involved, who you may not want to have large outright cash gifts. 

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Where gifts are made it is important that you keep good records of these as this information will be required in the future.