Giving away your money while you’re alive and saving inheritance tax

Giving away your money while you’re alive and saving inheritance tax

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Many people worry about having to pay inheritance tax when they die. But few are aware that they can give money away while they’re still alive. The rules are quite strict so you can’t give away a fortune. But you may be able to give away more than you think.

Giving away your money – how much can you give away?

HM Revenue and Customs lets you give away some money every year without risking an inheritance tax bill when you die.

SAVVY TIP: It’s worth bearing in mind that you’ll only pay inheritance tax if the money and property you own when you die is worth more than the inheritance tax threshold, which is £325,000 in 2019-20. The rules say you can give away:

  • Up to £3,000 in any one tax year. You can give the £3,000 away to one person or to several.

SAVVY TIP: If you don’t give away the £3,000 in total one year you can use up the remainder of your allowance in the next tax year. However, you can’t ‘carry over’ the unused portion beyond one year.

  • Up to £250 to anyone you like. You can give away as many gifts of up to £250 as you want to but you can’t give more than £250 to that person. If you do, the inheritance tax free exemption is lost.
  • Money when a family member or friend gets married. If your son or daughter gets married each parent can give cash or gifts worth up to £5,000, grandparents can each give up to £2,500 and anyone else can give up to £1,000.

SAVVY TIP: You have to either hand over the money or promise to do so before the date of the wedding/civil partnership ceremony or on the day itself. If the wedding/civil partnership is called off or you give the money after the ceremony and you’ve not promised it first, the inheritance tax exemption doesn’t apply.

  • Gifts out of income from normal expenditure. This is an inheritance tax allowance that many people don’t know about and it can be a trickier one to assess. The rules say that if you can afford to make regular gifts out of the income you receive (it can’t be out of your savings or other capital), you can give these away without having to pay inheritance tax.

SAVVY TIP: The gifts have to be regular, but don’t have to be monthly. For example, you could give a regular allowance to a child or grandchild, give regular Christmas and birthday gifts or pay into a stakeholder pension on their behalf.

Keep documentation

Tax experts say that it’s important to have a good ‘audit trail’ for HM Revenue and Customs. Write a letter to the person benefiting from the gift, saying that you are making a payment out of your income. You should keep a copy with your will so that the executors know exactly what’s been given away.

  • Gifts to charities or political parties. You can give away money while you’re alive (or leave it in your will) and there’s no inheritance tax to pay.

Giving away money and surviving for seven years

There is another way that you can give money away while you’re alive and not face the prospect of an inheritance tax bill, and that’s by using ‘potentially exempt transfers’ (PETs) or the seven year rule
It works like this:

  • You give away money to your child/grandchild or whoever you like. It doesn’t matter how much you give them.
  • You live for at least seven years after you’ve given away the money/assets.
  • There’s no inheritance tax bill to pay when you die. Your executors will need evidence of what you gave away and when you did it. But as long as you can show that you gave away the money/painting etc at least seven years before you die, they won’t have to pay inheritance tax.

Surviving for less than seven years

The tricky bit is that none of us knows how long we will live for but it might still be worth giving money away because if you don’t survive for the full seven years your estate won’t have to pay inheritance tax on the full amount.

SAVVY TIP: Although you can give away more than the £3,000 a year limit mentioned earlier, you only benefit from taper relief if you give away more than the nil rate band within the last seven years. So, if you give away £400,000 within the last seven years, and survive for at least three years after giving way the gift, you can get a reduction on the amount of the gift that exceeds the inheritance tax threshold or nil rate band. In tax year 2019-20 the threshold is £325,000, so you’d get taper relief on £75,000 of your gift, but not the rest.

  • If you die between three to four years after you’ve given away the money the inheritance tax to pay is 32%.
  • If you die between four to five years after you’ve given away the money the inheritance tax to pay is 24%.
  • If you die between five to six years after you’ve given away the money the inheritance tax to pay is 16%.
  • If you die between six to seven years after you’ve given away the money the inheritance tax to pay is 8%.

Useful links:

There’s information on giving away money during your lifetime on the website.

Related articles:

Understanding your inheritance tax allowance or nil rate band

Transferring unused inheritance tax allowance – what’s involved

VIDEO: When can you challenge a will?

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