Inheritance Tax warning: Gifts can reduce tax bill – but Britons must remember time frame

Tax: Personal finance expert provides advice on investments

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Inheritance tax is commonly known as the levy on the estate of someone who has died. A person’s estate can include their property, assets and money. Normally, no IHT is paid if either the value of someone’s estate is below the £325,000 threshold or if they leave everything above the £325,000 threshold to their spouse, civil partner or charity as a gift. As a tax relief, taper relief is applicable when inheritance tax is due on a gift that is made within seven years before a donor’s death.

If a donor dies between three to seven years after making a gift and the total value of the gifts is above the £325,000 threshold, any IHT for gifts is reduced on a sliding scale.

Taper relief only applies for gifts and reduces the tax payable on the amount of gifts over the inheritance tax allowance.

The rate at which the tax relief is applied is decided by the timing of the gift. For example, if a gift was made between three to four years before someone’s death, the tax due would be 32 percent.

If a gift was made between four to five years before someone’s death, the tax due would be 27 percent.

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Inheritance Tax time frame

Inheritance Tax warning: Gifts can reduce tax bill – but Britons must note important time frame (Image: GETTY)

Furthermore, if a gift was made between six to seven years before someone’s death, the tax due would be eight percent.

Following this period, gifts are removed from the inheritance tax calculation after seven years from the date they were made.

It is vital Britons remember that taper relief only applies to the amount of tax the recipient pays on the value of the gift above the nil rate band.

Writing for What Investment, Charles Calkin of James Hambro & Partners, outlined how this seven-year window can impact the average person’s IHT bill.

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“Courtesy of complex tax rules, the top rates of income and inheritance tax are much higher than you might think,” he explained.

“On IHT, meanwhile, the key is to plan early with the help of professional advice.

“In practice, there are many different ways to reduce the value of your estate so that when it is passed on to your heirs, the IHT bill is reduced or non-existent.

“For example, you can make lots of small gifts with no IHT implications at all, while larger gifts are usually ‘potentially exempt transfers’ (PETs).

Inhertiance Tax timeframe2

Inheritance Tax Warning:Taper relief only applies for gifts (Image: GETTY)

“The value of these PETs falls out of your estate as long as you live for at least seven years after making them.

“Also, remember that money left to heirs from a private pension is IHT-exempt. Maximising your pension savings – and then drawing on other savings first in later life – can be an excellent form of estate planning.”

Addressing Rishi Sunak, Mr Calkin offers advice to the Chancellor over what he should do with the taper relief.

He said: “My advice to the current chancellor would be to scrap the tapers.

“I am not convinced they raise as much money for the Treasury as they do for accountants, solicitors and financial planners who have to help people deal with them.

“Until they are scrapped, be alert to these taper traps and if you are affected, take advice.

“It will cost you, but smart planning could also save you thousands.”

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