Best to leave clear and complete records if you plan to gift assets in later life – Jenny Ross

An inherent tax is feared by many but paid by few. For those with estates likely to exceed the tax-free allowance of £325,000 (£500,000 if you’re leaving your home to children or grandchildren – meaning a total allowance of £1 million for a couple), you can reduce the tax bill your loved ones could face by giving away some of your wealth in your lifetime.

But there are limits to how much you can give away tax-free – the main one being your ‘annual exemption’ of £3,000. Any gifts that fall outside these limits are treated as ‘potentially exempt transfers’ meaning they too might end up being free from inheritance tax, but only if you live for at least seven years after making them.

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If you die within seven years of making a gift it will still be treated as part of your estate for inheritance tax purposes, but it won’t necessarily incur the headline inheritance tax rate of 40 per cent.

You can reduce the tax bill your loved ones could face by giving away some of your wealth in your lifetime.

In fact, most gifts don’t actually become taxable because the £325,000 inheritance tax allowance (known as the ‘nil-rate band’) is allocated to gifts you made within seven years of your death before the rest of your estate.

But once you’ve given away more than £325,000, anyone who gets a gift from you in the seven years before your death will have to pay inheritance tax. For example, if you gave £325,000 to your son five years before your death, and £10,000 to a friend three years before your death, your friend would have to pay tax on the full £10,000 because the gift to your son used up your nil-rate band.

This would be at a reduced rate of 32 per cent (a bill of £3,200) thanks to the sliding scale you mention – known as ‘taper relief’ – where the rate goes down based on how many years it’s been since the gift was made . If you died six years after making the gift, the rate would go down to 8 per cent.

It’s important to bear in mind that if you’re planning to gift your home to your son but remain living there, it’ll be treated as a ‘gift with reservation of benefit’. This means it will continue to form part of your estate for inheritance tax purposes, even if you live for seven years after – unless you pay your son full market rent to stay in the property.

In terms of documenting gifts, there are no rules on exactly how to do this. You don’t need to declare them yourself – ultimately it will be the job of your executor(s) to work out what gifts you’ve made and to report these to HMRC when they come to administer your estate.

Of course, this job will be much easier if you’ve left clear and complete records (and you’ve told your executors where to find them). One of the best ways to do this is simply to keep your own copy of the form that HMRC requires executors to complete, which is called ‘IHT 403’ and can be downloaded from the website.

This asks for information such as the date a gift was made, the name of the recipient and your relationship to them, a description of the asset, Best to and its value at the time it was gifted.

There’s no need to keep a record of gifts that fall within your annual exemption of £3,000. And if you’ve already gifted an asset there’s no need to mention this in your will. Your will is there to ensure that any assets you still own at the time of your death are distributed in the way that you wish.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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