Making use of your inheritance tax allowances
You might have heard that inheritance tax (IHT) is something you can avoid if you give away enough assets at least seven years before you die. But since we can't predict our own passing and still need money to live, this isn't always practical. Thankfully, there are various IHT allowances and exemptions that let you make gifts during your lifetime without worrying about IHT, even if you pass away within seven years of making the gift.
Regular Payments from Income
If you give money from your income, it doesn’t count towards your estate for IHT as long as you can still cover your living costs. For instance, if you have extra income each month, you could help a child with their rent, pay for a grandchild's school fees, or support a relative financially.
You can give away as much of your surplus income as you want and also use various allowances and exemptions to make gifts from your capital without worrying about IHT.
IHT Annual Exemption
The annual exemption lets you make gifts up to £3,000 a year without adding them to your estate for IHT purposes. Unlike many other exemptions, if you don’t use your full IHT annual exemption in one tax year, you can carry the unused amount to the next year. However, you must use the current year’s exemption before dipping into any unused amount from the previous year.
So, if you didn’t use your 2022/23 annual exempt amount, you can make gifts up to £6,000 before the end of the 2023/24 tax year without them being added to your estate.
Small Gift Allowance
The small gift allowance means you can give £250 a year to as many people as you want without these gifts being part of your estate. The catch is that gifts to the same person can’t benefit from both the small gift allowance and another allowance or exemption.
Wedding and Civil Partnership Gifts
The value of this exemption depends on your relationship with the recipient. For gifts to a child getting married or entering a civil partnership, the exemption is £5,000. For a grandchild, it’s £2,500, and for anyone else, it’s £1,000.
The same person can benefit from a wedding/civil partnership gift and other exemptions and allowances, except the small gift allowance. For example, if you haven’t used your 2023/24 or 2022/23 annual exemption and your child gets married before April 6, 2024, you could give a wedding gift of £11,000 free of IHT.
Gifts to Spouses and Civil Partners
You can give gifts to your spouse or civil partner free of IHT without any limit.
Other Gifts
Exemptions also apply for certain gifts to charities, registered clubs, political parties, housing associations, and for national or public benefit.