Gifts & Exemptions from Inheritance Tax

When you pass on your estate to somebody after you die, they may have to pay Inheritance tax on it. This tax can substantially halve the amount of money you left behind. Many people make gifts to their family and friends when they’re alive to reduce the estate value for Inheritance tax purposes. But tax planning is not short of pitfalls so get professional advice before doing anything. Read further to know about gifts and exemptions from this tax.


How much can my spouse get tax-free?

The government has a tax exemption in place for married couples and civil partners. They can pass on their estate tax-free to their spouse when they die. This means, no Inheritance tax applies on it. There’s also a provision to pass on unused tax-free allowance to their partner. For instance, an estate worth £400,000 can pass from husband to wife. She can add her own tax allowance to it. However, if you give gifts to an unmarried partner, it could be taxable.


How much can my children and family tax-free?

It doesn’t matter how many pounds you gift your children and family. What does matter is the time you gift it. If you live more than 7 years after giving this gift, the recipient will be fully free from Inheritance tax on it. However, if you suddenly die before 7 years are over, they might have to cough up this tax to the government. In that situation, it becomes a “potentially exempt transfer” (PET). Remember that the gift may come under other tax heads like Income tax or Capital Gains tax. Make a note of what you gave, to whom you gave, when you gave it and how much it’s worth. This will make it easier for your executor to work out tax on your estate.


Is contributing to charity tax-free?

Any amount you contribute for the purpose of charity will be essentially free from Inheritance tax. This could also gain you some relief on Income tax. If you leave to charity at least 10% of the ‘net value’ of your estate, tax authorities may give you a reduction from 40% to 36%.

What is the annual gift allowance?

Every UK citizen has the right to an annual gift allowance of £3,000. That means cash or assets worth upto £3,000 are exempt from payment of Inheritance tax. Needless to say, gifts above this amount come under the scanner and incur a tax on inheritance. Again, the amount payable depends on whether the giver gave it within 7 years of his death. There’s also an option to carry over your leftover gift tax allowance from one tax year to the next, upto a maximum of £6,000. But, you can’t accumulate tax allowance for many years and use it to buy a single expensive gift.


What is a Potentially Exempt Transfer?

You may give gifts when you’re alive but they don’t necessarily incur tax then and there. This is because the recipient of the gift doesn’t pay tax only if you pass away within 7 years of such a gift. The gift is treated as ‘Potentially Exempt Transfer’ (PET) for those many years. This is because it’s only potentially exempt, seven years is a long time and nobody knows what will happen. The Inheritance tax calculation is done this way. For older gifts, the tax rate is lower. Gifts you still have a stake in are also not exempt from Inheritance tax, for example, if you gifted your house to your son and continued staying with him.


Which assets are exempted from Inheritance tax?

Certain assets come in for full or partial tax exemption. It’s also known as tax relief. These assets are:

  • Business:
    Depending on how much ownership you had in the business and of what type it was, you would get either a 100% or 50% tax relief on it.
  • Agricultural property:
    If you have a farm that you want to pass on to your children, it’s possible tax-free. However, farm assets like agricultural equipment aren’t exempt from Inheritance tax.
  • Woodland property:
    Woodland property in itself doesn’t come under tax. But, if the trees on the land or sold or given away as timber, Inheritance tax may apply.
  • Heritage assets:
    Being the owner of artifacts or land of national importance from a scientific, historic or artistic point of view can get you a tax relief. However, certain conditions need to be met.