For anyone concerned about potential inheritance tax charges on their estate once they are gone, a simple first step to take is to make sure that all the inheritance tax exempt gifts are fully utilised each tax year.
The basic rule is that gifts made within 7 years of death will be included in your estate for inheritance tax purposes. However gifts of up to £3,000 can be made in each tax year without them being added back to the value of your estate.
Any unused gift allowance can be carried forward from the previous tax year, thus if no gifts were made in the previous year a total of £6,000 can be given.
In addition to the £3,000 annual exemption, other gifts may be made in particular circumstances:
- Wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
- Normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift
- Payments to help with another person’s living costs, such as an elderly relative or a child under 18
- Gifts to charities and political parties
- Small gifts of up to £250 per person, so long as no other exemption was used for the same person.
It is important to remember that only a small minority of deaths (3.9% in 2017/18) result in an inheritance tax charge. In general, a married couple can pass on assets worth up to £1,000,000 free from inheritance tax, although there will be some exceptions to this rule.