Find out how you can lower the amount of inheritance tax you have to pay by making gifts from your estate, and learn what is meant by the term “possibly exempt transfer.”

Is it possible for me to avoid paying inheritance tax by giving money away?

When you pass away, a portion of your estate may be subject to inheritance tax if it is valued at more than £325,000 (or £650,000 for married couples and civil partners), depending on which amount is higher.

Consider donating assets while you are still living. This is one of the most direct ways to avoid paying taxes on things that aren’t necessary, and it’s also one of the most effective.

You are permitted to make some gifts without incurring any inheritance tax liability after your death. These often consist of bequests to your spouse or civil partner, as well as bequests to charitable organisations if you wish to leave money to them.

In most cases, it also covers presents that were given to specific individuals more than seven years before the decedent’s death.

However, if you make a gift less than seven years before your death, the value of that present may be subject to inheritance tax when it is included in your estate.

There’s also a chance that you’ll have to pay inheritance tax if you place your money in a trust or if you pass on ownership of a firm or shares in a business to someone else (although it’s possible that you’ll qualify for business relief, which is discussed in more detail on gov.uk).

The following infographic presents a few of the most important facts regarding the giving of deductible charitable donations. However, since this is a very complex topic, it is in your best interest to see an expert for guidance regarding your particular set of circumstances.

Whom may I give money to without having to pay taxes on it?

Donations made to your spouse or civil partner as well as the tax on inheritance

In most cases, there will be no tax imposed on these donations. This does not cover partners who are not married.

Our guide on inheritance tax for married couples and civil partners has additional information that may be of use to you.

Donations to members of your own family or to other people

It is a good idea to arrange how you want to leave money to other members of your family, such as your children, if you have the intention of doing so after you pass away.

It is preferable to hand over some presents to the recipient while you are still living rather than leaving them in your will. The vast majority of donations that you provide to other individuals more than seven years before your death are exempt from taxes (they must be to people as opposed to trusts or businesses).

These kind of gifts are referred to as “possibly exempt transfers” due to the fact that taxes may need to be paid on them depending on whether or not the donor has survived seven years after the gift was made.

The potential exemption of certain transfers is discussed in more detail below.

If you want to give money to your children in another way, one option is to make a deposit on their mortgage. However, before you do this, you should get some outside advice first.

presents that are to your advantage

If you give anything to another person that you will still benefit from throughout your lifetime, you cannot take advantage of the gifting restrictions that are in place.

For instance, if you give away your home but continue to live in it rent-free until the day you die, you will be considered to be the beneficial owner of the property, and it will still be taxed as part of your estate when you pass away. This is true even if you give away your home to a charity.

Are you making a will?

You can draught your own will and have Which? Wills look it over for an affordable price; for more information, go to the website of Which? Wills.

What exactly is meant by the term “annual exemption” when referring to the inheritance tax?

You are permitted to donate up to a total of £3,000 in any given tax year that you are still alive.

You are only allowed to carry forward any unused portion from one year to the next; for example, if you did not use this amount the previous year, you would be able to donate a total of £6,000. This present is referred to in legal parlance as your “annual exemption.”

This indicates that you will often be in a position to give away £6,000 as a pair, with the possibility to give away £12,000 if you didn’t make any significant presents the previous year.

Which kind of donations are exempt from taxes?

Presents with a value of less than £250

You are allowed to offer a single recipient any number of gifts worth up to £250, but you cannot give gifts to anyone who has previously benefited from your yearly exemption.

Donations paid for with money

There is a possibility that gifts made out of income will not be taxable. Because of this, if you contribute money from your income or pension, it won’t count toward the inheritance tax that you owe. Since the gift must originate from one’s income, selling assets for the purpose of giving away the profit would not be permissible because it would leave the recipient open to the possibility of owing taxes in the future.

According to HMRC, a consistent pattern of spending needs to be established with regard to these presents. Although this does not imply that you are required to make a long-term commitment to donating significant sums on a regular basis, it is unlikely that one-time gifts will be accepted. A reasonable rule of thumb is that if the gift comes from your current account, it has a good chance of being eligible.

These donations are also exempt from taxation if you have any relatives who are now reliant on you for their upkeep because of old age or illness. This would also include a former husband, wife, or civil partner that you were previously married to.

Also excluded from inheritance tax are gifts made for the support, education, or training of your children who have not yet reached the age of 18 (this includes stepchildren and adoptive children).

Wedding gifts

As long as the present is given before to the wedding and the wedding does take place, there is no obligation to pay tax on the money given to the couple who is being married. Your relationship to the person who will receive your gift determines the maximum amount that you are able to give:

up to £5,000 from each parent of the couple, £2,500 from each grandparent or more distant family, £2,500 from the bridegroom to the bride (and vice versa), and between civil partners, and £1,000 from anybody else.

Donations made to charitable organisations as well as political parties

There are several recipients to whom you will be exempt from paying inheritance tax:

charities have their roots in the UK
national museums universities the National Trust political parties (generally, those represented in parliament with at least two MPs) registered housing associations community amateur sports groups national museums and universities the National Trust political parties

In addition, if you leave money to charitable organisations or political parties in your will, you can be eligible for a lower rate of inheritance tax (36 percent, rather than the standard 40 percent) to be applied to the remainder of your estate. To be eligible, the charity in question must be established in the United Kingdom, and the amount that you bequeath to charity must constitute at least ten percent of your “net” (that is, after-tax) inheritance.

“Potentially exempt transfers” are a term used in relation to the inheritance tax.

The majority of the gifts that you give to other people during your lifetime are considered “potentially exempt transfers,” or PETs for short. This is the case even if the gifts are on the list of gifts that are exempt from taxation.

If you are still alive after seven years after making the gift, you won’t have to pay any inheritance tax. However, in the event that you pass away before to the expiration of this time period, the gift will be regarded as part of your estate for purposes of the inheritance tax.

In most cases, PEPs are subtracted from your tax-free allowance of £325,000 before being applied to the rest of your estate.

Therefore, it is quite unlikely that the receivers will have to pay inheritance tax unless you have given them presents with a value that is greater than this limit.

However, if a significant portion of the tax-free allowance has already been used up to pay for deductible charitable contributions and taxable lifetime gifts, there may be very little or no allowance left over to pay for the remainder of the estate.

Learn more about the inheritance tax, including the various thresholds and rates.

What is meant by the term “taper relief” in relation to the IHT?

Even if a gift does result in a tax liability, that tax could be reduced because to something called “taper relief.”

The following chart provides an explanation of how taper relief can lower the amount of tax that is owed on potentially exempt transfers (PETs).

Taper relief might lower the tax on PEPs if you pass away within seven years of making them, but it won’t lower the tax that needs to be paid on your estate as a whole.

Consider the following instances, each of which involves attempting to pass on £600,000, partially as gifts and partially as a final estate. If that seems complicated, consider the cases that follow.

The first example is a gift that falls below the nil-rate band.

Anne passed away in April 2018, leaving an estate of £500,000 after making a donation of £100,000 in March 2013.

Because Anne does not survive for the full seven years after making the gift, it is now considered to be a component of her estate.

When subtracted from her total limit of £325,000, the PET payment of £100,000 leaves a balance of £225,000 that can be applied toward the remainder of her estate of £500,000.

The remaining $275,000 is subject to taxation at a rate of forty percent, which results in an inheritance tax bill of $110,000.

Gifts that are in excess of the nil-rate band are the second example.

In March of 2013, Bill gave away £400,000, and then he passed away in April of 2018, leaving another £200,000.

After he passes away, the PET will be reevaluated, and his personal allowance of £325,000 will be applied toward the donation of £400,000.

Due to the fact that the donation is in excess of the allowance and that he continued to live more than five years after making the gift, the portion of the present that is taxable will be subject to a tapering rate of 16 percent, which will result in a tax bill of £12,000 for the receiver.

The forty percent inheritance tax that is applied to the remaining two hundred thousand pounds of the estate results in an additional inheritance tax payment of eighty thousand pounds.

When compared to the previous scenario, this one results in an inheritance tax payment of £92,000, which represents a savings of £18,000.

Exhibit three: a bequest made more than seven years before the donor’s passing

In March of 2010, Charlie made a donation of £400,000, and then he passed away in April of 2018, leaving an additional £200,000.

Because it was created more than seven years before he passed away, the PET is counted as a success when he does pass away. There will be no additional inheritance tax consequences as a result of the gift because it is exempt from inheritance tax.

In addition to this, the remaining estate, which is valued at £200,000, is below the exemption threshold of £325,000, meaning that there is no tax due on this portion of the estate either.

When opposed to the first scenario, there is no payment whatsoever made toward inheritance tax, which results in a saving of £110,000.

Example four: many gifts

Danielle makes various transfers, some of which should be exempt, including a gift of £200,000 in March 2013 and another gift of £200,000 in March 2015. In April of 2018, she passes away, leaving behind a total of £200,000.

After the initial offset of £325,000 against the first gift of £200,000, there will be a balance of £125,000 to be offset against the second gift of £200,000.

This leaves her with £75,000, which is subject to a tax rate of 32% because she resided in the same place for more than three years after making the money. This results in an income tax liability of £24,000 for the second beneficiary.

The remaining £200,000 is subject to taxation at a rate of 40%, which results in an additional tax bill of £80,000.

Inheritance tax comes to a total of £104,000, which is a saving of £6,000 in comparison to the first illustration.