Caution parents gifting their children money, as there could be an increase in inheritance tax bills, said professionals. Under present rules, individuals can make gifts of up to £3,000 per annum without the same attracting death duties. The single individual may receive the entire amount, or it can be shared amongst several recipients.
Inheritance Tax and Gifting Limits : What’s Exempt and What’s Not
Exemptions have been pointed out by experts who are showing how this happens with rising liabilities for inheritance tax. This includes transfers to spouses and civil partners, donations made to qualifying charities, housing associations and other exempt bodies and possibly exempt transfers (gifts made 7 years before the donor’s death).
- Annual Gift Allowance: You can gift up to £3,000 each tax year without it being subject to inheritance tax.
- Exempt Gifts: These include:
- Transfers to a spouse or civil partner
- Donations to qualifying charities and housing associations
- Potentially exempt transfers (gifts made seven years before the donor’s death)
- Small Gifts Exemption: Gifts of £250 or less per person per tax year are exempt.
- Special Occasion Gifts: Gifts for weddings or civil partnerships are exempt up to certain limits (£5,000 for a child, £2,500 for a grandchild or great-grandchild, £1,000 for others).
- Normal Expenditure Out of Income: Regular gifts made from surplus income are also exempt.
Speaking to The Express, Charlene Young, a pensions and savings expert at AJ Bell, noted that while inheritance tax (IHT) is set at 40%, the average rate paid by estates in 2021/22 was a mere 13%. A variety of tax-free allowances, exemptions, and reliefs account for this reduction.
Major Exemptions: Spouses and Civil Partners
These reliefs and exemptions must be planned for according to Young. She highlighted that the largest relief remained transfers between spouses and civil partners, which accounted for over £15 billion in 2021/22 or almost 68% of all reliefs against assets above the IHT threshold.
- Spouse and Civil Partner Transfers: Gifts to a spouse or civil partner are exempt from IHT, provided both are UK-domiciled.
- Unmarried Partners: The exemption does not apply to gifts between unmarried partners, regardless of the length of cohabitation.
- Unlimited Small Gifts: You can give unlimited gifts of up to £250 per person annually, provided no other allowance has been used for that recipient.
Ms Young also observed that proper application of gift can decrease the value of your property thus reducing the amount of tax imposed upon death. This is a useful approach in estate planning for reducing inheritance taxation.