Reduce Inheritance Tax: How to Reduce IHT by 100% by Donating | Personal finance | Finance

Giving while you are still alive is a great way to reduce IHT. However, not all gifts you give will be free; your donations will be classified as a potentially exempt transfer or a chargeable lifetime transfer for IHT purposes.

Potentially Exempt Transfer (PET)

It is a gift or transfer of unlimited value, which may be exempt if you survive seven years from the date of the gift.

If you do not survive the seven-year gift, the PET potentially becomes payable and adds to the value of your estate for the IHT.

If the combined value is above the IHT threshold, IHT may be due.

This means that the remainder of the gift that does not fall within the zero rate bracket will only be subject to inheritance tax.

However, he may benefit from a tax reduction depending on the number of years that the individual has survived since the donation.

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For example: Shaun offers a property (mortgage free) to his son Charlie.

The value of the house is £425,000. As it is not his main residence, he will not benefit from the living allowance.

The property is £100,000 above the nil bracket (£325,000) and Shaun must therefore survive seven years to ensure this gift is not subject to IHT.

However, Shaun died five years after donating the property to Charlie.

Therefore, the gift was recalled in his estate for the purposes of the IHT.

Due to the potentially exempt transfer, he did not incur the full tax charge of £40,000 (40% of £100,000). Instead, Charlie paid £24,000 (60% off the full taxable IHT rate) on the gift.

*The following figures, including gifts, potential exemptions on transfers, tax advantage status, tax and eligibility criteria, are subject to future change. The figures provided are for guidance only and you should seek financial advice for personal recommendations. Some donations may require a survival time beyond seven years and you should therefore seek professional advice if necessary.

Take advantage of free gifts

We all love a gift! And there are many free gifts you can make to help reduce the value of your estate, if necessary, and ultimately reduce or avoid inheritance tax.

Copy taken from THE MONEY EDIT: Your No Shame, No Blame Guide to Taking Control of your Money by Makala Green, published by Yellow Kite £16.99

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