You can reduce inheritance tax with a gift of any amount – but there’s a catch | Personal finance | Finance

Inheritance tax is a 40% tax that must be paid on the total assets a person inherits, which are worth more than £325,000 from an individual or £650,000 from a couple – although it possible to further increase the threshold. A person can give up to £3,000 per year divided among any number of people and also give any number of gifts up to £250 per year, to different people.

There is also the possibility of giving a larger amount of money to a friend or relative, but in this case there is an important rule that people should know.

The person must live seven years after the donation to avoid tax, although the rate of tax decreases as the years progress towards the seventh year.

Here is how the tax rate evolves according to the years between the donation and the death of the person:

Three to four years – 32%

Four to five years – 24%

Five to six years – 16%

Six to seven years – 8%

Seven years or more – 0%.

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Donations can include a sum of money, household and personal property, property or land, or stocks and shares.

Gifts between spouses or civil partners avoid tax as long as the person receiving the gift lives in the UK.

People can also avoid tax by donating money to charities or political parties, as there is no tax to pay in this case.

There is also the possibility of giving gifts to someone who is getting married or enters into a civil partnership.

A person can give up to £5,000 to a child, up to £2,500 to a grandchild or great-grandchild or £1,000 to anyone else, and avoid the tax.

People can also reduce their liability by 40% to 36% if they leave something to charity in their will.

This applies if a person leaves at least 10% of their net estate to a charitable group or multiple charities.

Property is deemed to be “donated to charity” if it becomes “owned by charity or held in trust for charitable purposes only”.

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Other advice is to make sure you make a will, setting out how a person wants their estate to be distributed, to avoid being taxed unnecessarily.

Pension plans often provide allowances that avoid inheritance tax, and funds can be inherited upon a person’s death.

Setting up a trust to manage someone’s assets after they die is another way to avoid paying tax, although trusts can be complicated to set up, so it may be a good idea to seek legal advice.

Brits can also avoid tax by investing their funds in a business that has commercial property relief.

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