Important Inheritance Tax rules to watch out for when gifting
The rules governing Inheritance Tax (IHT) in England and Wales are notoriously complex and Britons have a tendency to find the thresholds and allowances relating to IHT confusing.
For example, there are a number of allowances available to individuals and families who ‘gift’ money throughout their lifetime – which can potentially save families money on IHT. But many families are unaware of these and will often fall foul of the rules.
Parents can give away ‘wedding gifts’ of up to £5,000 to any child that is getting married completely tax-free, while they are also entitled to pass on a maximum of £2,500 to a grandchild or £1,000 to anyone else tying the knot without attracting IHT.
Meanwhile, individuals have an annual gift allowance of £3,000 when it comes to gifts that do not fall in line with any kind of special occasion. Gifts up to this allowance will always be tax-free, but once gifts rise above the threshold, things can get confusing.
This is due to what is known as the ‘seven-year rule’ and how it affects ‘potentially exempt transfers’.
Any gifts passed on worth £3,000 or more will automatically acquire ‘potentially exempt transfer’ status – which basically means that the gift will only be IHT-free if the donor survives for more than seven years after making it.
To make matters even more confusing, the rate of IHT incurred if the gift falls foul of the rules will differ depending on how many years have passed between the date it was made and the date the donor died.
As mentioned previously, IHT is notoriously confusing, which is why it is often best for families to seek specialist advice.