What is Excluded from Inheritance Tax
Inheritance tax is a complex subject that often leaves many individuals and families puzzled about what assets are subject to taxation and what are not. Understanding what is excluded from inheritance tax can help individuals plan their estates more effectively and potentially reduce the tax burden on their heirs. This article aims to provide a comprehensive overview of the various assets and circumstances that are typically excluded from inheritance tax.
1. Gifts Given Three Years Before Death
One of the most common exclusions from inheritance tax is gifts given three years before the donor’s death. These gifts are known as potentially exempt transfers (PETs) and are exempt from inheritance tax if the donor survives for another seven years after making the gift. If the donor dies within this seven-year period, the gift may still be taxed, but at a reduced rate.
2. Small Gifts
Another exclusion is small gifts made during the donor’s lifetime. These are known as exempt gifts and include birthday and wedding presents, as well as occasional gifts of up to £250 per person per year. It is important to note that these gifts must be made to a specific individual and cannot be made to a married couple or civil partners as a pair.
3. Wedding and Civil Partnership Gifts
Wedding and civil partnership gifts are also excluded from inheritance tax. Gifts given to the couple, their children, and grandchildren are exempt up to certain limits. For example, gifts given to the couple on their wedding day are exempt up to £5,000, and gifts given on subsequent anniversaries are exempt up to £2,500. Additionally, gifts given to the children and grandchildren of the couple are exempt up to £1,000 per person.
4. Life Insurance Policies
Life insurance policies can be excluded from inheritance tax if they are written in trust and the policy is paid out directly to the beneficiaries. This means that the proceeds from the policy will not be included in the estate for inheritance tax purposes. However, if the policy is not written in trust, the proceeds may be subject to inheritance tax.
5. Personal Belongings and Property
Certain personal belongings and property, such as jewelry, furniture, and household items, are exempt from inheritance tax. Additionally, the main residence of the deceased may be exempt up to a certain value, depending on the circumstances.
6. Charitable Donations
Gifts to registered charities are exempt from inheritance tax. This includes both outright gifts and gifts left in a will. Moreover, if a charity is named as a residuary beneficiary in a will, the entire estate may be exempt from inheritance tax, depending on the specific circumstances.
Understanding what is excluded from inheritance tax is crucial for estate planning and ensuring that your loved ones are not burdened with unnecessary tax liabilities. By familiarizing yourself with these exclusions, you can make informed decisions about how to structure your estate and maximize the benefits for your heirs.
