You can slash inheritance tax with gifts – but there’s a catch

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Inheritance tax is a 40 percent tax that has to be paid on any total assets that a person inherits, that are worth more than £325,000 from an individual or £650,000 from a couple – although it may be possible to increase the threshold further. A person can give away up to £3,000 a year divided between any number of people and also give away any number of gifts of up to £250 a year, to different people.

There is also the option to give away a larger sum of money to a friend or relative but in this case there is an important rule that people should be aware of.

The person has to live for seven years after the gift is given to avoid the tax, although the rate of the tax does reduce as the years progress towards the seventh year.

This is how the rate of the tax changes depending on the years between the giving of the gift and the person’s death:

Three to four years – 32 percent

Four to five years – 24 percent

Five to six years – 16 percent

Six to seven years – 8 percent

Seven years or more – 0 percent.

Gifts can include an amount of money, household and personal goods, a property or land, or stocks and shares.

Gifts between spouses or civil partners avoid the tax as long as the person receiving the gift lives in the UK.

People can also avoid the tax by giving money away to charities or political parties, as there is no tax to pay in this case.

There is also the option to give gifts to someone who is getting married or entering a civil partnership.

A person can give away up to £5,000 to a child, up to £2,500 to a grandchild or great-grandchild or £1,000 to any other person, and avoid the tax.

People can also reduce their liability from 40 percent to 36 percent if they leave something to charity in their will.

This applies if an individual leaves at least 10 percent of their net estate to a charitable group or to several charities.

An asset is deemed to be “given to charities” if it becomes “the property of charities or is held on trust for charitable purposes only”.

In this case, the value of the charitable gifts is deducted from the taxable amount before inheritance tax is charged.

People can check if they qualify for the reduced rate using a calculator tool on the Government website.

Before using the tool, a person will need to know:

  • The value of the assets in the estate
  • How the assets are owned
  • The total value of the assets in each part of the estate
  • The value of any debts and liabilities that must be paid out of the estate
  • The amount of any inheritance tax relief and exemptions
  • The amount of any charitable donations already made
  • The value of their allowance threshold, or ‘nil rate band’
  • The value of gifts the deceased made in the seven years before their death.

Other tips are to be sure to make a will, explaining how a person wants their estate to be distributed, to avoid being taxed unnecessarily.

Pension schemes often have allowances which will avoid inheritance tax, and the funds can be inherited when a person dies.

Setting up a trust to handle a person’s assets after their death is another way to avoid paying tax, although trusts can be complicated to set up, so it may be a good idea to seek legal advice.

Britons can also avoid the tax by investing their funds in a company that gets business property relief.

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