Inheritance tax planning: a little each year…
A major UK newspaper reported on the recent results of a survey that was carried out to establish the public’s understanding of Inheritance Tax (‘’IHT’’) a tax which, is fair to say, continues to be one of the most unpopular and controversial taxes at the Chancellor’s disposal.
Rather shockingly, it was reported that only 1 in 10 of the 4,000 survey respondents knew how much cash they could gift during their lifetime before risking a charge to inheritance tax.
Without knowing what the future holds, it is more than understandable why many are reluctant to pass wealth to younger generations for fear of leaving themselves short in their later years. Indeed, our advice to clients is to not let the ‘tax tail wag the dog’ and that potential IHT savings should not be made at the expense of financial security.
Nevertheless, making regular smaller gifts in your lifetime can be an effective method of reducing the value of your estate to mitigate future IHT liability.
Below are some examples:
The ‘annual exemption’
You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate when assessing your estate’s liability to IHT on your death.
If you don’t give away £3,000 in one year, you may carry it forward for the following tax year and use it then in addition to your allowance for that year. But you can only combine two years you cannot save up several years’ worth of allowances and use them all at once.
Each person has this allowance so a couple can each make use of their own individual allowances.
The small gift allowance
Gifts of no more than £250 to individual recipients per tax year are excluded from inheritance tax (and are not counted toward the £3000 annual gift exemption). This is particularly useful for those with large families. For example, someone with 10 grandchildren could give each of them £250 annually and the gifts would not be taken into account in calculating the value of their estate. Again the small gifts exception exists for individuals so both grandparents could give £250 to each grandchild if they wished.
Small gifts of up to £250 are not counted toward the £3000 annual exemption – although you cannot combine a small gift with the annual exemption and give an individual £3,250. If you did and were to die within seven years of making the gift then £250 (i.e. the part in excess of your allowance) of it would be added back into the value of your state for the calculation of IHT/use of the allowances available to an estate on death.
Each tax year, you can also make gifts to individuals for certain occasions, without running the risk of IHT being payable on your death. For example, you can make wedding or civil partnership gifts of up to £1,000 per person, £2,500 for a grandchild or great-grandchild and £5,000 for your child.
Again, these gifts are exclusive of the annual exemption and small gift allowance.
Gifts to charities are exempt from IHT, as are gifts between spouses. Gifting between spouses can be a useful way to split the risks of lifetime gifts. If your spouse has no money in their own name they could give away but you have more than you wish to keep you could, for example, transfer money to them for them to pass on making use of their (otherwise) unused allowances.
Any gifting in excess of the above exemptions and allowances is likely to be classed as a potentially exempt transfer (‘’PET’’) which in order not to affect your estate’s IHT position on your death will need you to survive 7 years from the date of the gift.
We recommend you obtain professional advice before making substantial gifts as there may be other tax and/or practical implications to consider.
The Trusts & Estates’ Team at Hart Brown are able to provide specialist inheritance tax planning advice that is tailored to your circumstances. We are also able to help in all areas of wills and probate, including drafting a will, making a lasting power of attorney and dealing with the administration of a trust or an estate.
This is not legal advice; it is intended to provide information of general interest about current legal issues.