Is it a good idea to give money to avoid inheritance tax? Probably not. Are there
better ways to do it if you wish to avoid inheritance tax? Almost certainly - so
get in touch to receive inheritance tax advice specific to your situation.
Gifts and Inheritance Tax
If you give away money and other assets with the view of saving inheritance tax you
need to be aware of the rules - otherwise it may all be in vain. When you pass away,
your estate is counted as including anything that you gave away in the last 7 years
of your life, but with some elements omitted:-
£250 - you can give up to a total of £250 within any one year, to any number of individuals
without it counting towards your estate. But be clear - giving someone £200 for their
birthday and £200 for Christmas makes their individual total £400 and so it may count
in your taxable estate.
£3,000 - where an individual receives more than £250 from you in a year, you can
give up to an overall total of £3,000 within the year without it counting towards
your estate. So, a gift of £1,000 to each of two children would not be counted, but
a gift of £2,000 to each of two children totals £4,000 and so £1,0000 will count
towards your estate’s possible IHT bill.
There are special rules on marriage gifts - you can give up to £5,000 as a marriage
gift to your child, and up to £2,500 if it is your grandchild, or up to £1,000 to
anyone else - beyond these limits the gift will count towards your annual limit and
would be caught in the 7 year count-back.
Each member of a couple has their own limits, so together you could be giving away
£6,000 each year and it would avoid IHT. If you do not fully use the £3,000 limit
in a given year it can be rolled forward, but only to the next year and no further.
There is nothing to stop you giving more than these limits - it is just that if you
die within 7 years the gift will count for tax purposes. However, for very large
gifts there is a tapering of the tax payable after year-3 up to year-7. If the gifts
are caught by this 7-year rule, even if they are not large enough to generate a tax
bill in their own right, they would use up some of the available tax free allowance
(the Nil Rate Band) and thereby reduce the amount of unused NRB that could be transferred
to your widow(er).
By the way, these limits have NOTHING to do with avoiding paying Long Term Care Fees
- that is, there is no limit below which the authorities have to consider that gifts
are not deliberate Deprivation of Assets.
When making a gift it has to be genuine e.g. if you give your house to your children
but continue to live in it rent-free then tax issues such as Pre-Owned Asset Tax
(POAT) and Gift with Reservation of Benefit (GROB) will apply. In that case you may
still be caught for IHT and could be creating an extra bill for Capital Gains Tax
for the family - a ‘lose-lose’ situation.