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How to save Inheritance Tax – Part 2
This is the second blog in my series about how you might be able to save Inheritance Tax. Last time I talked about making use of the various allowances and in this blog I will talk about making gifts and surviving seven years.
In the context of talking about gifts I am really focusing on making outright gifts to another individual for any amount in excess of the £3,000 annual allowance. There is no restriction on the amount that you can gift to another person, provided you are comfortable giving such amounts away.
If you make a gift and survive the gift by seven years then the value of the gift will be outside your estate for Inheritance Tax purposes. When making such gifts it is essential that you do not “reserve a benefit”; to do so means that the gift will not be effective for Inheritance Tax purposes and the value of the gift will still be taken into account when assessing your liability to IHT. It will not matter how long you have survived the gift, if you continue to reserve a benefit then it will always be taken into account when working out your IHT liability.
If you do survive the gift by seven years then the entire value falls outside your estate for IHT purposes. However, if you make a significant gift, broadly speaking of more than the Nil-Rate Band allowance of £325,000, and fail to survive such a gift by seven years but do survive for at least three years, then the amount of tax payable on such a gift will be reduced by taper relief.
Taper relief reduces the rate of tax payable on the gift, not the value of the gift.
Because gifts are set against your Nil-Rate Band allowance in the first instance, the value of gifts made has to exceed £325,000 before taper relief has any effect. If you are in the fortunate position of being able to make such significant gifts then the rate of tax will reduce from 40% after surviving the gift by three years to 32%, then to 24% after four years have passed, down to 16% after five years have passed and then 8% after six years have passed, with all of the tax being eliminated if you get past seven years.
Next time I shall be writing about making gifts out of income, which do not require you to survive such gifts by seven years.
For specific advice on Inheritance Tax matters, please contact Richard Horwood, Head of the Private Client team.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances. Longmores Solicitors LLP are not regulated by the Financial Conduct Authority and are not authorized to provide any form of financial advice.