There are a number of annual exemptions for certain gifts when considering IHT. These have the effect of removing the gift from the estate all together. They will not be brought back into an estate if the donor dies within 7 years of making the gift if the allowance has been correctly used.
This article will discuss the annual exemption of £3,000.
Key facts:
Let's assume Stan has not used any of his annual allowance for the previous year. He could gift £3,000 cash now to both his sister and daughter. As he covers his living expenses through his salary and has considerable cash reserves this won't create any hardships for him. What affect will making these cash gifts have on Stan's IHT liability? (we will assume he took the advice in the previous step to make the best use of his residence nil rate band)
Total estate - £1,259,000*
Less Nil rate band £325,000
Less residence nil rate band £175,000
£759,000
IHT at 40% £303,600
By making use of the annual allowance and his unused annual allowance from the previous year Stan has reduced his IHT liability by £2,400. If Stan continued to make full use of this allowance every year it will save £1,200 in inheritance tax yearly. Alternatively he could make use of the allowance every other year and benefit from the unused allowance brought forward.
To date Stan has reduced his future IHT liability by £72,400.
*£1,265,00 less £6,000 gifted (£3,000 to daughter and £3,000 to sister)
