What Counts as a Gift for Inheritance Tax Purposes?

If you’re the executor of someone’s estate you’re required to calculate its inheritance tax bill. With this in mind, Prestige Tax and Trust Services asks; what counts as a gift for inheritance tax purposes?

Definition of gift

You’re required to pay inheritance tax on the estate if it’s worth more than £325,000 when the deceased passes away. Keep in mind, however, that when you’re working out inheritance tax you may not have to pay it on gifts the deceased gave away whilst they were alive. The government defines a ‘gift’ for inheritance tax purposes as:

  • Anything which has value, such as money, possessions and property.
  • A loss in value when something is transferred. For example if a parent sells a house to their child for less than its market value, the difference qualifies as a gift.
  • Anything married couples or civil partners give each other – as long as they live in the UK permanently.

Seven year rule

However for something to qualify as a gift for inheritance tax purposes, it must adhere to the ‘seven year rule.’ This means that the original owner of the gift must have lived seven years after giving it. However any gifts given less than seven years before the deceased passed away count towards the inheritance tax threshold, and must be counted towards said threshold before the rest of the estate.

We must note that if the deceased gave away over £325,000 worth of gifts in their last seven years, inheritance tax is due on everything over that threshold. Also, the inheritance tax rate is reduced for gifts over the £325,000 threshold that were given between three and seven years before they died. This works on a sliding scale; inheritance tax is charged at 40%, for example, on gifts given under three years before someone died, but at 32% if it was given three-four years before they passed away.

Tax exemptions

There are certain other types of gifts that you’re not required to pay inheritance tax on. Gifts that fall under this category include:

  • £3,000 worth of gifts given away by the person that passed away in each tax year (April-April). Anything left over can be carried from one year to the next, but the maximum exemption is £6,000. If the gift falls under another exemption e.g. wedding gifts, it doesn’t count as part of this ‘annual exemption.’
  • Wedding or civil partnership gifts. They must be given on, or just after, the date of the ceremony to be exempt from inheritance tax.
  • Individual gifts worth up to £250 – the deceased can give as many of these to other people as they like in one year, and they’ll be exempt from inheritance tax. If they gave a gift worth over £250 in a tax year, the whole amount counts towards the inheritance tax – the initial £250 doesn’t fall under the exemption.
  • Gifts from the deceased’s income (after they paid tax), as long as they had enough money to maintain their normal lifestyle. Gifts that fall under this category include Christmas, birth and anniversary presents, regular payments into a savings account, and life insurance policy premiums.
  • Gifts that were given to help with other people’s living costs. This counts as an exemption if the gift was given to a child (including adopted) under 18 or in full-time education, a dependent relative (due to disability, illness or age) or an ex-spouse/civil partner.
  • Anything given to charities, universities, museums, community amateur sports clubs or political parties. This last exemption only counts if the party has either two elected members of the House of Commons, and or one elected member of the House of Commons who received a minimum of 150,000 votes in a general election.

Prestige Tax and Trust Services

If someone has appointed you as the executor of their estate, you must ensure it pays the correct inheritance tax. This can be a complex task, so why don’t you let Prestige Tax and Trust Services help? We have the knowledge, expertise and skilled professionals you need to fulfil your duties when somebody appoints you as the executor of their estate.

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