Gifts made years before death could be taxed by a third, according to an inheritance tax warning.

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Gifts made years before death may be subject to inheritance tax, resulting in a loss of a third.

INVESTMENT TAX cost the UK £5.1 billion last year, but is there a way to help your gifts avoid the tax?

With some exceptions, inheritance tax (IHT) often covers any financial gifts made up to seven years before a person dies.

However, if these gifts are given strategically and certain allowances are taken advantage of, some gifts can be completely tax-free, regardless of their value. So, how does inheritance tax work on gifts?

Gifts are anything given away that isn’t in one’s will, as all items and value in a will are considered part of one’s estate.

As a result, calculating IHT on one’s estate is usually easier, because gifts can include anything from:

Gifts also include any money lost when selling something for less than its market value; for example, if a parent sells their home to their children for less than it is worth, the difference is a gift.

Unless the deceased gave away over £325,000 in gifts in the seven years prior to their death, the IHT due for gifts is usually paid by the deceased’s estate.

Those who receive a gift within the next seven years will have to pay IHT if the threshold is exceeded.

IHT can apply to gifts made long before a person died, and the amount of tax owed is determined by the nature of the gift, who it was given to, and when it was given.

In essence, gifts made more than seven years before a person dies are usually tax-free, whereas gifts made within this time period are taxed at a different rate:

Gifts to the following people are exempt from IHT:

Every tax year, a certain amount of money is set aside for tax-free gifts.

The annual exemption allows you to give away £3,000 worth of gifts to as many people as you want.

Only one year’s worth of unused annual exemptions can be carried forward to the following tax year.

Small gift allowances allow you to give tax-free gifts up to £250 per person if you haven’t used another allowance on the same person.

Birthday and Christmas gifts paid with one’s regular income are also tax-free.

Gifts for weddings or civil partnerships can be tax-free as well, but there are some restrictions based on one’s relationship to the couple getting married.

A “gift with reservation” is a phrase used to describe this type of gift.

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