Inheritance tax labelled ‘unfair’ and ‘cruel’ by expert
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However, there are specific rules around gifting that people need to know and understand as some gifts could end up being taxed. Inheritance tax is a tax paid on the estate of someone who has died and includes their property, possessions and money. The tax is usually charged at 40 percent on anything above the nil-rate band allowance. The current nil-rate band is £325,000 per individual.
For example, if a person’s estate is worth £400,000, they will only be charged 40 percent tax on £75,000 which is the amount over the threshold.
Gifting is a way people can reduce their Inheritance Tax liability whilst they are still alive.
According to the rules, all adults can give away a maximum of £3,000 every year without paying tax on it. This is known as a person’s “annual exemption”.
The £3,000 can be to one person or be split between several.
People are also able to carry over their unused annual exemption to the next tax year however this is only for one tax year.
Couples can combine their allowances which means they can give away £6,000 without paying tax.
People can give as many gifts of up to £250 per person as they want each tax year, as long as they have not benefited from the £3,000 limit.
Birthday and Christmas gifts which are given from a person’s regular income are exempt from Inheritance Tax.
Parents can also gift £5,000 if any of their children are getting married, £2,500 to a grandchild or great-grandchild on marriage, and £1,000 to another relative or friend.
People can also make regular payments to help with another person’s living costs, known as “normal expenditure out of income” however, this should not affect a person’s own standard of living.
However, the seven year rule can sneak up on people and mean that tax is paid on the gifts they have given.
No tax is due on any gifts you give if you live for seven years after giving them, however if the person dies within the seven years there is a tax to pay.
Gifts given in the three years before the death are taxed at the full 40 percent.
Anything given three to seven years before the death is then taxed on a sliding scale known as ‘taper relief’.
Between three to four years, the gifts will be taxed at a rate of 32 percent.
Between four to five years, it will be taxed at 24 percent.
If the person dies five to six years after the gift it will be taxed at 16 percent and between six to seven years it will be taxed at eight percent.
The government recommends that people who are gifting keep a detailed record of what has been given.
This includes a record of what was given and whom it was given to, the value of the gift, and the date it was given.
Inheritance Tax on a gift is usually paid by the estate unless the person gives away more than £325,000 in gifts in the seven years before their death.
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