UK households can save up to £18,800 in inheritance tax with three little-known exemption rules.
Inheritance tax is a tax on the estate of someone who has died, which includes their property, money and possessions.
Normally there is no inheritance tax to pay if either the value of your estate is below the £325,000 threshold, or you leave everything above the £325,000 threshold to your spouse or civil partner.
If you give away your home to your children or grandchildren then this threshold can increase to £500,000, giving you an additional £175,000 allowance.
Government rules also state that if you’re married or in a civil partnership and your estate is worth less than your threshold, then any unused threshold can be added to your partner’s threshold when you die.
As such, married couples can potentially leave up to £1 million tax-free as they can transfer any unused allowances.
But anything above these allowances could be subject to 40% tax, unless you make the most of annual exemptions to make gifts.
Financial services company Fidelity International says it is possible to save up to £18,800 with some clever tax-planning around three little-known exemption rules which involve gifting money.
Gifts that are given less than seven years before you die may be subject to inheritance tax depending on who you give it to and their relationship to you, the value of the gift and when it was given.
But Fidelity International says there are certain amounts you can give away each year with no risk of them being taxed. These include:
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Annual exemption – you can give away up to £3,000 each tax year in total
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Gifts for weddings and civil partnerships – you can give extra gifts when someone gets married – £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else
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Small gifts exemption – you can gift £250 each year to as many people as you like, as long as you haven’t used another allowance on the same person
If you maxed out these exemptions they can add up over time and make a saving of up to £18,800 in inheritance tax.
The firm explains: “One of the simplest ways to reduce your IHT bill is to use annual exemptions to make regular small gifts. These exemptions are valuable because there’s a hidden tax trap – lifetime gifts can still be hit with IHT if you die within seven years of making a gift.
“The good news is that if you use the annual exemptions, the gift won’t be counted towards your estate even if you die within seven years.
“A couple maxing out their exemptions could potentially give £42,000 every seven years and a further £5,000 if their child got married. This means they could save up to £18,800 in IHT.
“These exemptions might seem small, but they can really add up over time, especially if you’re a couple and both use your allowances every year.”
