Many people decide to pass on assets – such as cash, savings, valuables and property – to their chosen beneficiaries during their lifetime. While you can of course gift whatever you like, the taxation of such gifts is widely misunderstood, with many people not realising that Inheritance Tax may be payable on such gifts during their lifetime.
Inheritance Tax applies primarily against the value of a person’s estate upon their death, although it can also be applied against the value of gifts made within the last 7 years of death and to some other lifetime gifts (such as gifts into Trust).
Each tax year an individual is able to make gifts up to the value of £3,000 free of Inheritance Tax, this is referred to as your ‘Annual Exemption’. It is also possible to carry forward any unused allowance from the previous tax year. In addition to this, there are also exemptions relating to gifts out of excess income, small gifts, gifts on marriage/civil partnership and gifts to charities and political parties.
Upon death, it will be your Executors responsibility to ascertain the extent of your estate for Inheritance Tax purposes, and this will also include the value of any gifts made within the last 7 years of your lifetime. Depending on the extent of your lifetime gifts, it is possible that the recipient of those gifts may be liable for Inheritance Tax. If a certain gift has been particularly high in value, and at least 3 years has elapsed since the date of the gift, then the Inheritance Tax can usually be tapered on a sliding scale.