You are thinking of making (or receiving) a gift now

If you are thinking of making or receiving a gift, there will be no inheritance tax to pay on the gift now, or in the future, if the total amount given away by the person who is making the gift now, and in the last 7 years is less than the inheritance tax threshold. From 6 April 2009 to 5 April 2015 is £325,000.

There is one further thing to watch. inheritance tax has a 7 year ‘clock’, so any gift today will stay on the ‘clock’ for the next 7 years! This means that although there will never be any tax to pay on a gift made today, if the total of today’s gift plus any other gifts made by the same individual in the previous 7 years is less than the inheritance tax threshold, today’s gift could affect the rate of tax due on any gifts made in later years, or the rate of tax due on an estate at death.

If you think you may have a problem with inheritance tax, you will probably need to take advice, but you may like to look at the mainly for advisers sections first.

Example:

Margaret gives her niece Rosanne £35,000. Margaret gave her nephew Gerald, £25,000 four years ago.

Looking at the gift to Rosanne, the gift itself is less than the inheritance tax threshold of £325,000. Also, the total of the current gift and any gifts in the last 7 years (£35,000 now plus £25,000 4 years ago) is less than the inheritance tax threshold.

Therefore there will never be any inheritance tax due on the gift to Rosanne. (For those who like complexity, the gift to Rosanne would be a ‘Potentially Exempt Transfer’ initially which would become a ‘chargeable transfer’ if Margaret died within 7 years. But so long as the 7 year gifts total is less than the inheritance tax threshold, we don’t need to fuss about such distinctions).

However, say that Margaret’s home is worth £300,000 and that she dies next year, leaving the house to Gerald and Rosanne equally. (For simplicity we will assume that her home is all she owns at death). In this case – assuming that the inheritance tax threshold stays the same – the total of Margaret’s home plus the gifts she has made in the last 7 years now exceeds the inheritance tax threshold.

One complication here is that you are entitled to deduct an annual exemption {glossary} of £3,000 per tax year from the gifts. You can also deduct the annual exemption for the previous tax year if this is unused. This means that the gifts to Rosanne and Gerald can both be reduced by £6,000 – assuming that Margaret has made no other gifts in these tax years.

So – the gift to Gerald of £25,000 (now 5 years ago) is reduced to £19,000 and the gift to Rosanne of £35,000 (now one year ago) is reduced to £29,000. As the estate at death was £300,000, the total of the estate at death plus gifts in the previous 7 years now stands at £348,000. This is £23,000 above the inheritance tax threshold. As a result, inheritance tax will be payable on £23,000 of the value of the estate at death.

So no tax is due at Margaret’s death on the gifts to Gerald and Rosanne, but the fact that Margaret made these gifts means that inheritance tax is payable on £23,000 of the value of the house! From a practical point of view, this could be a problem for Gerald and Rosanne, as they will inherit a tax bill along with the house! (Where inheritance tax is due on property, the tax may be paid by instalments over 10 years see section below).