My estate is worth over £325,000. I’m worried about inheritance tax (IHT) so I’m considering giving £100,000 to my wife, who could then gift the money to our children. If we do that, who has to survive seven years for the gift to become exempt from my estate for IHT?
Also, as my estate would then be worth less than £325,000, is the gift exempt?
A certain amount of your estate can be passed on inheritance tax-free; this allowance is called the ‘nil-rate band’ and is currently £325,000.
The standard rate of inheritance tax is 40% of anything over the £325,000 threshold.
However, if you’re passing on a home, or if you’re married or in a civil partnership, you may be able to leave more than this before paying tax.
From April 2017, a new allowance called the residence nil-rate band was introduced. This allows you to pay less inheritance tax if you’re leaving property to family. The residence nil-rate band is currently £125,000 and is set to rise by £25,000 in April 2019 and by £25,000 again in April 2020.
“Married couples and civil partners can pass assets to each other tax free”
So, if you are married or you are in a civil partnership, you can pass on a combined amount of £650,000 in 2018-19 without inheritance tax, or £900,000 if your combined estate includes your home.
Married couples and civil partners are allowed to pass their possessions and assets to each other tax-free, so the £100,000 gift to your wife would be tax-free and immediately outside your estate.
If your wife subsequently gifted this amount to your children, this would be considered as a potentially exempt transfer (PET). This means that the gift would only be fully outside her estate once seven years has passed. If your wife did pass away within seven years of making the gift, this amount would be included as part of her estate and considered for inheritance tax purposes.
If your wife’s estate, including the amount gifted, was worth less than the allowable nil-rate bands, it is unlikely that any inheritance tax would be due.