The Bottom Line on Inheritance Tax on Lifetime Gifts
Inheritance tax, or IHT, is the tax that may have to be paid out of a deceased’s estate to HM Revenue & Customs after death. An estate that is currently worth Aï¿½325,000 or less is exempt from any IHT, however, for estates worth over this threshold, tax can be payable at 40% of the amount that exceeds Aï¿½325,000.
What many people do not realise is that IHT is sometimes payable on gifts that were made to individuals within seven years prior to when the deceased died. This also applies to assets put into trust. And what sometimes comes as a shock to some, is that where IHT is payable on those gifts, it is the recipient of the gift, not the estate, who is likely to be liable to pay the IHT.
The rules are simple enough. An individual can make what gifts they like during their lifetime, but IHT may be payable in relation to such gifts.
If the deceased dies within three years of making the gift, and the estate is worth more than the IHT threshold then the recipient may have to pay 40% on whatever exceeds that threshold. After three years, there is a sliding scale so that the amount of tax that might be payable decreases by a fifth for each year until the seventh year when none is payable.
As with all rules, there are exceptions. For example, you can give gifts to charity which will not be taxable; you can give away up to Aï¿½3,000 a year, and Aï¿½5,000 as a wedding gift to a child without the risk of this being taxed, and you can make any number of small gifts of up to Aï¿½250 to as many different people as you like without incurring IHT.
You should also be aware that problems can occur with gifts, if for example you have retained the use of the gift after the date that the gift was made. In this instance the gifts will be taxable outside of the seven year window.
If you think your estate, or a gift you have received, may be caught by inheritance tax it is important that you take professional legal advice so that you know where you stand.