In addition to this, since 2017 there is an additional allowance which is gradually increasing each tax year and will eventually reach £175,000 in 2021. This is available when a property is left to direct descendants such as children or grandchildren and again, can be transferred from one spouse to another.
Any amount above these allowances will be subject to IHT at a rate of 40% depending on who the beneficiary is. Gifts to spouses and charities however are always exempt from IHT. It is possible to reduce your IHT liability by planning for the future now and one way to do that is to make gifts during your lifetime.
We can make small gifts of up to £250 to separate individuals during our lifetime which will not be taken into account when calculating IHT. In addition, we have a tax free allowance of £3,000 per tax year which can be gifted. If any of this tax-free allowance from the previous tax year remains unused it can be added on to the current year’s allowance giving a tax fee amount to be gifted of up to £6,000.
Any gift above this tax-free allowance is known as a ‘potentially exempt transfer' and will be exempt from IHT if you survive for 7 years after making the gift. This means that if you give away a lump sum of money or any other asset but die within 7 years your estate will be treated as though you still own that asset to calculate IHT, although the rate of tax payable is reduced depending on how long you survive after making the gift. If however you make a potentially exempt transfer but survive for longer than 7 years, this gift will not attract IHT.
Gifts made in contemplation of marriage can be tax-free and are in addition to the allowances mentioned above. The amount which can be gifted varies from £1,000 to £5,000 depending on your relationship with the recipient of the gift.
It is important to note however that giving away an asset but continuing to benefit from it will not reduce your potential IHT liability on your death as you will be treated as though you still own that asset. For example, if you gift your house to your children but continue to live in it, the value of the house will still be taken into account when calculating your IHT liability.