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Find out more'Will our gifts to our children be taxed?'
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It’s my understanding that my wife and I are jointly able to pass on up to £650,000 tax-free, so if our estate is less than this there will be no inheritance tax due.
We’re planning to make gifts to our children but could they be hit with an unexpected tax bill on these if we die within seven years of making them?
Mr Lowe, Norfolk
'There are plenty of gifting allowances'
Joanne Padilla, Which? money expert, says…
Whether your gifts could be subject to inheritance tax will depend on their size, recipient and nature.
Gifts you make more than seven years before your death will not form part of your estate – regardless of their value. Note these gifts must be ‘without reservation’, so you can’t benefit from them (read the case about gifting property on p49 for more on this).
Even if a gift does end up being included in the value of your estate, there won’t necessarily be any tax to pay on it.
That’s because the nil-rate band protects up to £325,000 per person (so up to £650,000 for a couple as you can inherit your spouse or civil partner’s allowance tax-free). This allowance is allocated to any gifts you made within seven years of your death before it’s used against the rest of your estate.
Your tax-free allowance is allocated to any gifts you made before it’s used against the rest of your estate
The residence nil-rate band gives an additional £175,000 each if you’re leaving your home to direct descendants – for example, your children or grandchildren. This means that as a married couple your estate can be protected up to £1m.
There are also smaller allowances for gifts. These include the £3,000 annual gifting allowance; gifts under £250 are also exempt if the recipient hasn't benefitted from your main £3,000 allowance.
There are separate allowances for wedding gifts (up to £1,000, or £2,500 for grandchildren and £5,000 for children) and gifts out of surplus income.
If your entire estate is to be passed to your wife, then your combined estate won’t be assessed for inheritance tax until her death, so be aware rules could change by then.
- Find out more: Ways to avoid inheritance tax
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