Many people choose to gift parts of their estate to their intended heirs before they die, but how do you work out how much inheritance tax might be used on such gifts? Her Majesty’s Revenue and Customs (HMRC) recently issued the following guidance.

While some gifts are exempt from inheritance tax, especially those gifted more than seven years before the person dies, not all gifts are exempt.

Most gifts are called potentially exempt transfers if the testator survives for seven years after gifting it. What is a gift? This can be money, property or a possession – anything with value. It must reduce the estate’s total value and any loss incurred must be included. An example of this is where someone sells their house to a child for less than its market worth. The difference in value counts as a gift.

Outright gifts

Outright gifts are those where value is transferred to someone else without condition. Exemptions include trusts, gifts where a person still has in interest and pre-owned gifts.

To work out the gifts to include when calculating the value of an estate and how much inheritance tax should be paid, a list of all gifts that are not exempt a person made in the last seven years should be made and a running total kept of their value.

If the running total exceeds £325,000, tax is due on the part of any gift that took the total over £325,000 and any gifts made after that.

The £325,000 threshold

So, if a person who died in 2021 when the income tax threshold was £325,000 and in the past seven years, they gifted a total of £357,000, with a gift of £30,000 in 2017 taking the total to more than £325,000, then inheritance tax is due on the part of £30,000 that brought the total over the threshold and all the later gifts.

Gifts always count towards the inheritance tax threshold before any other assets or property that the person who died left. Gifts must be valued depending on how much they were worth at the time the person gave them.

Gifts that are exempt include

  • assets passed to a spouse or civil partner
  • gifts to charities, housing associations, and other exempt organisations
  • potentially exempt transfers (gifts made seven years before the person died)
  • gifts of £3,000 or less in any tax year
  • small gifts of £250 or less
  • wedding and civil partnership gifts
  • regular gifts or payments that are part of your normal expenditure and made out of income

For any gift to a charity to qualify as exempt, it must be to one that is registered as a charity in England and Wales, Scotland or Northern Ireland, or is established as one in other countries and is managed by fit and proper persons.

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