There are a number of financial decisions that require you to take a gamble on how long you’ll live. Inheritance tax is one of them.
Married couples and civil partners can inherit their spouse's estate tax-free, but the same does not apply to other family members and friends.
Above the £325,000 threshold, the standard 40pc inheritance tax rate kicks in – or £450,000 if a home is being given away to children or grandchildren (rising to £500,000 in April 2020). If you're married or in a civil partnership, any unused allowance can be added to your partner's when you die.
One tactic to reduce the tax bill is to give away money while you are still alive.
Money can be gifted to family and friends, and as long as you remain alive for the next seven years after the gift is made, that transfer will be free of inheritance tax.
There is also a £3,000 annual “gift allowance” per year. Gifts that add up to less than £3,000 in a year are free of inheritance tax, regardless of when you die.
If you make a gift above this allowance, and die within seven years, how much tax has to be paid depends on when you die, based on a tiered structure.
When you first make the gift, it is classed as a “potentially exempt transfer”. If you die within seven years, that exemption stops.
The table below shows how much tax will be due depending on when you die.
On top of the £3,000 annual allowance, there are a number of other gifts you’re able to make each year without incurring inheritance tax on them.
These including wedding gifts of up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, or £1,000 for any other recipient; normal gifts such as birthday and Christmas presents as long as they don’t affect your standard of living; payments to help with another person’s living costs; and gifts to charities and political parties. You can also gift as many £250 gifts (per recipient) to anyone who hasn’t benefited from your £3,000 annual exemption.
Regular gifts made out of post-tax income, which don't affect your quality of life, are also exempt. There are various conditions to be met, such as proving the intention of the gifts, and actually making regular payments rather than setting money aside. A tax adviser may be required.
For all the forms of gifting above, keeping detailed records is key to ensuring you can prove that the exemption applies.