Inheritance Tax – What You Need To Know

People give gifts all the time for birthdays, Christmases, Weddings and more. Obviously, these gifts don’t require the person who receives them to pay any tax on them. This, unfortunately, is not the case for all types of gifts. There are different rules and regulations dependent on what you gift someone, how you gift it and whether the gift you give still benefits you. There are also different rules on what the receiver of the gift needs to do. Below we hope to clear some of this up for you and explain clearly what gifts involve Inheritance Tax and which do not.

The lifetime transfers are known as PETS (potentially exempt transfers). These gifts will achieve their potential and become exempt from Inheritance Tax if the taxpayer survives for more than seven years after gifting. If the donor of the gift dies between three and seven years after the gift is made then there is a tapered relief available.

The amount of Inheritance Tax paid within this timescale if the estate or gift left is worth over £325,000 is as follows:

• Within three years – the full amount of IHT is due
• Within three to four years – 80% of the IHT is due
• Within four to five years – 60% of the IHT is due
• Within five to six years – 40% of the IHT is due
• Within six to seven years – 20% of the IHT is due

These rules are different if the person who donated the gift still retains ‘enjoyment’ from it. This is usually if the donor doesn’t want to give up control over the assets involved. These gifts fall under the title of ‘Gifts With Reservation of Benefits rules’.

An example of this is when an elderly person decides to gift their home to their children or grandchildren (who usually have their own home), yet continues to live in the house rent-free. In this case, HMRC would say the basic position of the donor remained unchanged or that this is a Gift With Reservation of Benefit rules’ as the elderly person is still enjoying and using the gift. The taxman would therefore not accept that a true gift had been made and it would therefore remain subject to Inheritance Tax even if the donor of the gift died more than 7 years after the transfer.

You also are able to gift up to £3,000 each tax year without it being included in your estate when you pass. This annual allowance can be carried over to the next tax year meaning you are allowed to gift up to £6,000 in one year.

Usually a ‘Gift With Reservation of Benefit rules’ can be avoided if the donor pays full market rent for the use of the asset gifted.
If you are in a similar situation and would like assistance on whether your gift would be taxed or not, do not hesitate to contact us on 01908 046 964 or request a free call back from our accountants in Milton Keynes for expert advice.