If you have assets worth in excess of the Inheritance Tax allowance (currently £325,00) your estate will be liable to tax following your death at a rate of 40% on the value of your assets over the allowance (unless you leave your assets to an exempt person or body, such as your spouse or a charity).
One way of reducing your Inheritance Tax (IHT) liability is to lower the value of your estate by giving away any assets that you no longer need. However, by simply giving something away does not immediately remove its value from your estate. The general rule is that you need to live for seven years from the date of the gift before it is free from of IHT.
However, if certain conditions are met it is possible to make gifts which will be immediately exempt from IHT, i.e. if you died the day after you made the gift, no IHT would be payable on the gift.
One example is to make gifts from your excess income, if you receive more income than you need for your day to day living. This is a very useful exemption because there is no limit on the amount of income that you can give away. In order to claim the exemption, you need to make regular gifts out of your income to the same people. For example, monthly or annual gifts to your children or grandchildren. You must also be able to maintain the same lifestyle after making the gifts, without having to dip into your capital.
Other examples include certain wedding gifts, any number of small gifts of up to £250 (to different people) and other capital gifts not exceeding £3,000 in total in any tax year.
To ensure the exemptions can be claimed, you should keep a record of the gifts you make and comply with the relevant rules.