What Constitutes a Gift? For IHT purposes, a gift is anything of value, be it property, possessions or money. A loss in value is also counted as a gift for IHT purposes (i.e. if you sell your house to your child for less than it is worth then the difference in value is viewed as a gift). Gifts to spouses and civil partners are free of IHT. Gifts Out of Income This is a little known exemption with a high potential tax saving for your estate. Tax-free lifetime gifts can be given through the ‘normal expenditure out of income’ inheritance tax exemption. The following conditions need to apply:

• The gift must form part of your regular expenditure
• It must be paid out of income
• You must be able to maintain your normal standard of living after giving the gift

This can be implemented by paying a regular standing order out of your net income to your children or grandchildren or by meeting the cost of something like their university fees. These gifts are totally IHT free and, unlike other gifts, you do not have to survive seven years to keep the gifts tax-free. Annual Gifts Exemption You can give away £3,000 a year without it being added to the value of your estate. If you do not use your full exemption in one year (6^th April to 5^th April) it can be carried forward to the next year, after which it will be lost. Wedding or Civil Ceremony Gifts Tax-free gifts can be given for a marriage or civil partnership. The amount you can gift IHT free is up to £5,000 for your own child, £2,500 for your grandchild and up to £1,000 for anyone else. Other Tax-Free Gifts Payments to help with the living costs of an elderly relative or child under the age of 18 can be made free of IHT. Also, if you gift at least 10% of the net value of your estate in your will to a charity, IHT can be charged at a reduced rate of 36%. To check eligibility go to the HMRC calculator https://www.gov.uk/inheritance-tax-reduced-rate-calculator   Seven Year Rule You can give away as much as you like IHT free as long as you survive at least seven years after the gift has been given. If you survive less than three years IHT is payable on the full amount of the gift, and the amount tapers until it is IHT-free at seven years. There are anti-avoidance rules which apply if you have previously owned an asset you gift and continue to receive a benefit from, for example, if you gift your house to your children and continue to live in it rent-free. In this case in order to avoid IHT you would need to:

• pay your share of the bills
• live there for at least 7 years (if you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7-year rule applies)
• pay rent to the new owner at the current market rate

You do not have to pay rent to the new owners if you only give away part of your property and the new owners also live there. Life Insurance Policy to Pay IHT IHT often has to be paid before probate is granted. This can leave family and friends with a hefty tax bill when you pass away. Taking out a life insurance policy to pay some or all of the IHT liability can make things easier on them when it comes to sorting out your estate. Alternatively, HMRC may accept a delay or staged payments, but they may charge penalties and interest on the amount of IHT that should have been paid. The S4B Team S4B are a team of Chartered Accountants and Profit Consultants based in Maidenhead. If you would like to see how we could help you with your inheritance tax planning or any other financial issues contact us at [email protected] or call us on 01628 623444.