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Why you should consider gifting & charitable donations


Below are details on how gifting and donations can help reduced your overall estate total value, and thus provide some IHT tax-relief.

Gifting money

You are currently able to gift portions of your estate, providing the amount does not exceed the present annual allowance of £3,000 – be that assets or cash up to the value of that amount. In turn, this means that any gifts are then excluded from the total value of your estate when it comes to calculating your Inheritance Tax (IHT) rate. Any unused allowance from that tax year may be carried over once and used within the following tax year only.

You are eligible to give gifts up to the value of £250 as many times as you wish, to as many individuals as you like, excluding to those who have already received a £3,000 gift.

Special Circumstances

There are some exceptions as to when the annual allowance may be increased, one of which is gifting for the purpose of a wedding. Below details the increased allowance limits and the permitted/intended recipients.

  • a child can receive £5,000 or less,
  • a grandchild or great-grandchild can receive £2,500 or less, or
  • another relative or friend can receive £1,000 or less.

Potentially Exempt Transfer (PET) –> Chargeable Consideration

The PET enables people to gift over £3,000 or an unlimited value amount which is still viewed as separate and exempt from your total estate valuation for IHT calculations. However, this is solely under the proviso that those gifting survive for the next seven years. This is known as a Potentially Exempt Transfer.

Should those who have gifted under a PET not survive for the next seven years, this then becomes a Chargeable Consideration, meaning the recipient must add the value of the gift to their estate for IHT purposes. Should the combined value be more than the IHT threshold, then IHT may be due.

*For example, if a gift of £400,000 is given:

  1. The gift will initially use up the available NRB of £325,000 (oldest gifts are attributed first).
  2. The remaining £75,000 on death is then subject to IHT (in addition to IHT on the estate).
  3. If the remaining £75,000 was given over three years before the death, taper relief may apply.
  4. For example, if the whole gift was made between three and four years before the death, the tax charge on the £75,000 would be 32%.
  5. So IHT due on the PET would be £24,000.

*Source: moneyadviceservice.org.uk

Charitable Donations

If you state within your will that you wish to make a donation to a charity of your choice, this in return will reduce your IHT rate. The tax-relief benefits of doing this are:

  • You can reduce the total IHT rate of your estate from 40% to 36% if you have donated 10% of your total net estate, or
  • Your donation will be taken off the value of your estate before your IHT is calculated.

Your donation options are:

  • A fixed amount,
  • An asset or specific item,

The remainder after all other gifts have been deducted, this is called leaving a ‘Charitable Legacy’.

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