With some forward planning, you can find ways to avoid inheritance tax, ensuring your loved ones can benefit fully from your estate when you pass away. Prestige Tax and Trust services explains the rules you should keep in mind when making gifts out of income for inheritance tax purposes.
Your estate is liable to pay 40% inheritance tax, if its value eclipses a threshold (currently £325,000). However in some cases when you give a gift (anything with value or which causes a loss in value when transferred) it can be deducted from the value of your estate, reducing your inheritance tax bill.
So what counts as a gift? This is where the seven year rule applies. Gifts given at least seven years before you die, do not count towards your estate, but those made within this time frame receive exemptions on a sliding scale, with your beneficiary becoming responsible for paying inheritance tax.
It is also worth noting that each tax year, you can benefit from a range of gift exemptions, deducting the value from your estate. These gifts for inheritance tax purposes range from charitable donations, to gifts given at weddings and civil partnerships (up to £1,000 or more for children and grandchildren). You can also give up to £3,000 worth of gifts away each year, without inheritance tax obligations
We should also point out that these exemptions include any ‘normal’ gifts you make out of your income. This refers to things like birthdays presents and Christmas presents, where you pay for the gift out of your wages. You should remember that these presents do count as gifts for inheritance tax purposes, as long as you can maintain your standard of living after giving them away.
For inheritance tax purposes, remember that you can use more than one exemption on the same person. You could give them a birthday present and a wedding gift in the same tax year and deduct both from your estate. You can also give up to £250 in gifts to one person per tax year, further lowering your inheritance tax bill, but you will not be able to use any of the other exemptions on this individual.
Prestige Tax and Trust Services
Therefore with some strategic planning, you can give small gifts to various people within a tax year, allowing for significant reductions from the value of your estate, lowering it inheritance tax bill. In order to deploy this strategy effectively, it is wise to enlist the aid of experts. Prestige Tax and Trust Services’ team has the expertise needed to help you navigate inheritance tax matters carefully.