Inheritance tax explained IHT taxable gifts

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Some gifts are taxable unless you live on for seven years

Some gifts are taxable at the time you make them. These are mainly gifts to companies and to the trustees of most types of trusts. Read the HMRC guide to trusts and how they work.

However, you won’t have to pay tax on these gifts at the time you make them if the running total of all the taxable gifts made in the previous seven years comes to less than the tax-free allowance (see Inheritance tax: thresholds, rates and who pays).

Example: below threshold

If John put £250,000 into trust in May 2015, having made no other gifts during the previous seven years, the gift is technically taxable because it’s made to a trust and not an individual. However, the amount is less than the current tax-free allowance of £325,000 so no tax has to be paid.

However, if John died within seven years of making the gift, the tax-free allowance that would be applied to his estate would be reduced by the amount of the gift, ie £325,000 - £250,000 = £75,000. Only £75,000 would therefore be applied against the rest of the estate.

Example: above threshold

If John had made a previous gift of, say, £250,000 to the trust in 2010, his total taxable gifts during the seven years to May 2015 would come to £500,000 and he would have had to pay IHT on anything over the tax-free allowance. In this example John would have to pay tax on £175,000 (£500,000 - £325,000).

If tax becomes due on a lifetime gift, it’s paid at half the normal rate – so currently 20%. In our example John would pay tax of £35,000 (20% of £175,000).

If you die within seven years of making the gift it’s reassessed at the death rates, so there is likely to be more tax to pay.

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Last updated:

April 2016

Updated by:

Ian Robinson

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