Give It Away And Live For 7 Years
No inheritance tax is payable on most gifts in your lifetime so long as you live 7 years after the gift. These gifts are known as a Potentially Exempt Transfers (PET)
If a gift is made but there is some reservation on it, such as gifting your house with the understanding you can still live there until you die, this will not count as a PET and will still form part of your estate that is subject to IHT on at death. However, the gift will be effective for capital gains tax, which can create a double tax charge for the person a that inherits the house.
If you give away cash that is used to purchase your house, you can be liable to income tax on the benefit of living in the house. This is called the pre-owned asset charge.
There is a sliding for scale for the amount of IHT payable for death within the 7 years.
Of course if your estate is worth less than £325,000, no IHT is ever payable.
Other Gifts That Are Always Free Of Inheritance Tax
The following will always be free on IHT, whenever they are made…
- Small gifts to the same person of not more than £250 in a year.
- Gifts in consideration of marriage of £5,000 from parents, £2,500 from grandparents and £1,000 from anyone else.
- Normal expenditure out of income where the amounts given are part of your normal expenditure taking one year with another.
- Amounts up to £3,000, with any unused amount being allowed to be carried forward to the following tax year.
- Any gifts between spouses/civil partners, where the person who receives the gift is domiciled in the UK.
- Any gifts to charities or political parties.