Inheritance tax

If you're one of the few who will see inheritance tax charged on their estate, there are ways of reducing the bill.

Specifically, money or gifts given away during your lifetime can affect how much inheritance tax your estate will need to pay. So, if you're planning on making gifts, it's worth getting familiar with the rules.

In simple terms, any gifts given more than seven years before your death WON'T be liable for inheritance tax (unless they form part of a trust).

But gifts given in the seven years prior to your death will count towards your £325,000 inheritance tax allowance. So even if the gift(s) you give in the seven years prior to your death amount to less than £325,000, they could have an impact on how much inheritance tax will be charged on the rest of your estate.

If your gift(s) amount to more than £325,000 in the seven years prior to your death, then inheritance tax on the amount above £325,000 (in addition to any inheritance tax due on the remaining estate) will be charged on a sliding scale (up to a maximum of 40%).

But before we delve deeper into how this sliding scale works, be aware that everyone is able to give away a certain amount in exempt gifts each year...

Tax-free gifts

Each tax year, you are able to give away a certain amount of money or possessions tax-free (in other words, gifts that are exempt from the seven-year inheritance tax rule).

This means you can:

• Give away £3,000 (annual exemption). The first £3,000 given away each tax year does not form part of your estate so is not subject to inheritance tax. If you don't use your full annual exemption in any given year, the remainder can be carried forward to the next tax year (but no further).
  
  
• Give to charities with no limit. Donations or gifts to charity are not subject to inheritance tax. And where a charity donation is equivalent to at least 10% of your estate, any inheritance tax payable elsewhere is reduced to 36% from 40%. See our Cheap and free wills guide for ways to remember a charity.

• Give £250 to everybody you know. Gifts of up to £250 per person each year are not subject to inheritance tax. So somebody with 12 grandchildren could give each of them £250 each year as a birthday present. These gifts do not count towards the £3,000 annual gift exemption (described above) – though you can't combine gifts on the same person. So if you've already gifted someone your £3,000 annual exemption, you couldn't then give them £250.
  
  
• Give money freely from your income (as long as it doesn't affect your lifestyle). Inheritance tax is a tax on your assets. And as a regular income (such as a pension or earnings) is not treated as an asset, you can regularly give money away from this income – tax-free – so long as it's not detrimental to your lifestyle.
  
  
• Give wedding gifts (up to a limit). If a family member or friend is getting married, you're able to gift them money tax-free. You can only make such a gift once a year, and there's a limit on how much you can give: £5,000 to a child, £2,500 to a grandchild and £1,000 to anybody else. Wedding gifts can be combined with your £3,000 annual exemption (so they can be used on the same person) but not with the £250 small gift allowance.
  
  
• Fund a loved one's living costs. For example, you can contribute to your child's living costs and tuition fees at university. There are no caps on how much you can contribute, and it can be given tax-free as long as the money comes from your own regular income and doesn't affect your own lifestyle. Such funding can be combined with your £3,000 annual exemption (so it can be used on the same person) but not with the £250 small gift allowance.

See the Gov.uk website for more information about tax-free gifting.