It is said there are two certain things in life: death and taxes. Inheritance tax (IHT) combines both of these, being a tax paid on estates over the nil rate band value of £325,000. The value over the nil rate band is currently taxed at 40%. 

With the value of the family home generally increasing in recent years, more people are finding themselves hit by this tax. Fortunately, there are a few ways of passing on your assets to your loved ones without their getting hit with an IHT bill. Whilst all the following refer to the financial value of the exemption, gifts can be any sort of asset and do not have to be in cash.

Regular gifts out of normal income
This is mainly intended to cover things such as birthday and Christmas gifts, but it is not limited to that. You can make regular monthly payments to your loved ones and those payments will fall out of your estate. To qualify two criteria must be met. The payment must have some degree of regularity, so sporadic and one-off payments will not count. They must also leave the donor sufficient funds from their income to meet their own costs. If gifts require them to dip into savings to pay their own bills, then the exemption will not apply.

Wedding or civil service ceremony gifts
Anyone can give a gift valued up to £1,000 on the occasion of a wedding or civil ceremony. If one of the people getting married is your grandchild, then the limit for the gift increases to £2,500. If they are your own child, then the limit increases again to £5,000.

Supporting a relative
If you assist a relative with their own living costs, this will be exempt from IHT. This will normally apply to payments supporting an elderly relative or those related to looking after a child under the age of 18.  

Annual exemption
You can make gifts totalling up to £3,000 each tax year without them being subject to IHT. This is the annual IHT allowance. This does not have to be a single gift, nor does it have to be to a single individual. If you do not use all your allowance in any given year you can carry forward the unused balance to the following year. Any brought forward allowance not used in this second year will be lost.

Small gifts
You can make a gift of £250 per person each tax year. This exemption cannot be used with any other exemption, so it will not be available for a given individual if you have already used one of the other exemptions above.

Transfers between spouses
Transfers between spouses are always exempt from IHT. This includes any amounts transferred on the death of one half of the couple. When the second person dies, they inherit the unused portion of the nil rate band (currently £325,000) of their former spouse for their own estate.

The 7-year rule
If you cannot use any of the options above, the final way to get an asset out of your estate is through the 7-year rule. If you survive 7 years or more after making any gift, then there will be no IHT to pay on the gift. If you die before then, the amount of IHT due will potentially be reduced as follows:

Final note
Whichever exemption you are applying, gifts must be made without keeping any rights to the asset gifted. For example, if you pass on your home to your children you would subsequently need to pay them rent. If they allowed you to continue living there rent-free then that property would still be considered to be part of your estate. 


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