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Want to reduce the inheritance tax your estate will have to pay?
Start learning to love gift-giving!

What is inheritance tax?
Inheritance tax is a tax on the transfer of assets from a deceased individual to their beneficiaries. Despite its name, it can also arise in a small number of specific situations during lifetime. Unlike income tax, which is based on earnings, inheritance tax focuses on the value of the assets being passed on.

Being generous can serve as a good strategy to mitigate inheritance tax liability as the tax is generally paid on the value of your estate at the time of your death. Therefore, giving assets away during your lifetime will effectively ensure more of your assets pass to your intended beneficiaries over time.

Some Exemptions
Here are some exemptions to be aware of when it comes to inheritance tax planning by way of making gifts:

1. The 7 Year Rule:
Gifts given within the seven years preceding your passing can effectively be ‘clawed back’ into your estate and be subject to inheritance tax. However, if you live for at least seven years after making a gift, the value of assets transferred will be outside your estate for inheritance tax purposes. Gifts made in the three years leading up to your death are effectively subject to a flat tax rate of 40%. For gifts made between the third and seventh years before your death, taper relief gradually reduces the applicable tax rate. Starting at the standard 40%, the rate decreases annually. If you survive beyond seven years, no taper relief is applied, and the gift becomes exempt from inheritance tax.

2. Annual Gift Exemptions:
In addition to the ‘7 Year Rule’, you can gift up to £3000 each tax year without this being added to the value of your estate. This can be given to one individual or split between several people. You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. Each tax year, you can also give a tax-free gift to someone who is getting married or starting a civil partnership. You can give up to:
• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person

3. Normal Expenditure Out of Income:
You can make regular payments to another person, for example, to help with their living costs. There’s no limit to how much you can give tax free, as long as:

• you can afford the payments after meeting your usual living costs
• you pay from your regular monthly income

What can be gifted?
Any assets can be gifted including money, household and personal goods, real estate and stocks and shares.
However, remember that if you give something away but still benefit from it (for example, giving your home to a relative but still living there), it will count towards the value of your estate.
The material and information above is for general information purposes only. For a comprehensive understanding of the intricate rules surrounding gift-giving, please contact OCG Legal via email at enquiries@ocglegal.co.uk or by phone at 01724 840400.

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