Potentially exempt transfers
These transfers are potentially exempt from Inheritance Tax, and there is no limit on such transfers. This is an excellent way of transferring assets that you do not need to keep in your estate. However, it may be advisable to cover substantial gifts by insurance against death within seven years.
Any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as 'Potentially Exempt Transfers'.
However if you give an asset away at any time, but keep an interest in it - for example you give your house away but continue to live in it rent-free - this gift will not be a ‘Potentially Exempt Transfer’.
If you die within seven years and the total value of gifts you made is less than the Inheritance Tax threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate.
However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate. Life assurance policies to cover this tax risk are available if you wish.
If you die between three and seven years after making a gift, and the total value of gifts that you made is over the threshold, any Inheritance Tax due on the gift is reduced on a sliding scale. This is known as 'Taper Relief'.
However, you can make substantial gifts out of your taxable estate into trust now, and as a trustee retain control over the assets. There may be an Inheritance Tax charge, but this would be at 20%, and then only if the transfer is over £325,000. The Inheritance Tax treatment of assets held in trust is extremely complex and expert tax advice needs to be taken if you are considering this option.
Gifts do not have to be in cash. You could save more Inheritance Tax and / or Capital Gains Tax by giving away assets with the potential for growth in value. Give while the asset has a lower value, and the appreciation then accrues outside your estate.