Inheritance tax rate could be slashed to zero – but it depends on when you give the gift

Inheritance tax: Financial advisor provides advice

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Inheritance tax is often referred to as the most hated tax amongst the British public and in 2021 the UK government collected a record £5.9billion. This is an increase on the £5.2billion which was collected in 2020. The expectation is that the takings for the tax is to continue to increase over the next few years. This is due to rising inflation, spiralling house prices, and the freeze to the nil-rate band until 2026.

Inheritance tax is payable on the estate of someone who has died.

The current nil-rate band sits at £325,000 per individual and means that anything over this amount will be taxed at a rate of 40 percent. No inheritance tax is paid if the estate is worth less than the threshold.

For example, if a person’s estate is worth £400,000, they will be charged tax on £75,000 which is the amount over the threshold.

One way that people can reduce the amount their loved ones pay whilst they are still alive is by gifting.

According to the rules, people can give away a maximum of £3,000 every year without paying tax on it.

This is known as a person’s “annual exemption” and the £3,000 can be given to one person or can be split between several people.

Couples can combine their allowances which means they are able to give away £6,000 without paying tax.

However, there are rules to gifting that many can get caught out on if they are not careful.

No tax is due on any gifts a person gives if they live for seven years after giving them, however, if the person dies within the seven years there is a tax to pay.

Gifts which are given within three years before the death are taxed at the full 40 percent.

Anything given between three to seven years before the death is then taxed on a sliding scale known as ‘taper relief’.

Between three to four years, the gifts will be taxed at a rate of 32 percent.

Between four to five years, it will be taxed at 24 percent.

If the person dies five to six years after the gift it will be taxed at 16 percent and between six to seven years it will be taxed at eight percent.

People can also give as many gifts of up to £250 per person as they want each tax year, as long as they have not benefited from the £3,000 limit.

Birthday and Christmas gifts which are given from a person’s regular income are exempt from inheritance tax.

Parents can also gift £5,000 if any of their children are getting married, £2,500 to a grandchild or great-grandchild on marriage, and £1,000 to another relative or friend.

Financial experts usually recommend that people think about their inheritance tax liability and tax advantage of the legislation and plan to gift earlier rather than later.

By doing so, people have the ability to cut down inheritance tax to zero.

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