More Britons are relying on inheritance – how you can avoid tax when gifting your money | Personal Finance | Finance

According to new research by probate lending experts at Tower Street Finance the majority of those under 35s, nearly two-thirds, stated they assume they’ll receive an inheritance from their parents. Around a quarter expect to receive money from one or more of their grandparents when they die. Those who can afford to leave an inheritance will need to be aware of the current rules of inheritance tax as a simple gift could leave a hefty bill for loved ones when they die.

Britons pay a tax of 40 percent on the value of someone’s estate, which is property, money and possessions when someone dies.

People pay the levy if the estate is worth above the current nil-rate band allowance which is £325,000 and they don’t have to pay if it is below this.

This threshold has been frozen at this level since 2009 and the current Government has frozen it again until 2026, due to this more people are expected to be dragged into paying the levy.

Under the current inheritance tax rules, all adults can give away a maximum of £3,000 every year without paying tax on it and is known as the “annual exemption” and it can be given to just one person or it can be split between several.

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Married couples and those in civil partnerships can combine their allowances which means they can give away £6,000 every year without paying tax.

Britons can also give as many gifts of up to £250 per person as they want each tax year, the only rule is that the person receiving the gift has not benefited from gifts within the £3,000 limit.

Tommy Gallagher, an ex-investment banker and the founder of Top Mobile Banks added: “The UK has a seven-year rule for inheritance tax and the rule applies to gifts that are given by a person during their lifetime, known as lifetime gifts, as well as gifts left in their will.

“Under the seven-year rule, if a person gives a gift and dies within seven years of making the gift, the value of the gift will be added to their estate for inheritance tax purposes.


“This means that if the value of the person’s estate, including the gift, is over the inheritance tax threshold, currently £325,000, their estate will have to pay inheritance tax on the value of the gift.”

With the seven-year rule, anything given three to seven years before the death is then taxed on a sliding scale known as “taper relief” with gifts given in the three years before death would be taxed at 40 percent.

Between three to four years, the gifts will be taxed at a rate of 32 percent and between four to five years, it will be taxed at 24 percent.

If the person dies between 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.

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Mr Gallager added: “A way to avoid being taxed on gifts is to spread the gifts out over a number of years, so that the value of any individual gift is below the annual gift allowance.

“This is known as gift splitting and can be a useful way to reduce the value of a person’s estate for inheritance tax purposes.

“Another option is to make use of the small gifts exemption, which allows a person to give away gifts of up to £250 per person per year without them being counted towards the annual gift allowance. This can be a useful way to give away small gifts without incurring any inheritance tax liability.”

However, Britons are also warned about “gifts with reservation” which is where a person makes a gift but “reserves a benefit” from it.

If something is classed as a gift with reservation then it will be included in the value of a person’s estate and tax will be paid on it regardless of how long someone lives after the gift is given.

Mr Gallagher also noted there are exceptions to the gifting rule with the first being gifts to spouses or civil partners, these are exempt from inheritance tax regardless of when the person dies.

The second exception is if the gift is given to a charity, as all gifts to charities are also exempt from inheritance tax.

The expert added: “Finally, people can also make use of inheritance tax exemptions and reliefs to reduce the amount of inheritance tax that their estate has to pay.

“For example, there is a 100 percent inheritance tax exemption for farm and business assets, as well as a 50 percent inheritance tax relief for gifts to charities.

“By making use of these exemptions and reliefs, people can reduce the amount of inheritance tax their estate has to pay on their gifts.”

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