The thought of the taxman taking 40% of the wealth you have accumulated in this world when you leave it can be infuriating for you, and worse for those you wanted it to go to.
That is what inheritance tax could mean. But there can be ways to mitigate it. One of the most obvious ways to stop the taxman taking a big share of your money when you die is to give it to your loved ones when you are still alive. You can simply give them as much as you want.
Of course, the taxman is aware of this. Although he canโt stop you giving while living and doing what you want with your money, he can make it a little more difficult to mitigate inheritance tax being due on it.
There are rules in place to prevent โdeathbed givingโ. These go much further than preventing you giving away your worldly goods in your last hours.ย In fact, if you donโt live at least another seven years after making the gift, it will be included in your estate, and the taxman will demand 40% of it back from whoever you gave it to.ย
This makes planning ahead impossible. None of us knows how long we have to live, or to enjoy our generosity.
The Office for National Statistics (ONS) website shows a man of 70 has a life expectancy of another 16 years. One in four will live another 22 years. Women of the same age can expect to live another 18 years. One in four will live another 24 years.
But even if you die a bit earlier than seven years it could still save some tax. Live three more years, and the tax liability starts to taper off, by 20% a year. Die in six rather than seven years and only 20% of the gift will be added to your estate.
Any gift must be absolute. If you give it away and still have the use of it, then it will count as yours when inheritance tax is calculated.ย This really applies to things, rather than cash. You canโt for example give away your home and continue to live in it rent free. This is known as gift with reservation of benefit (GROB), and the taxman will simply not allow it. You canโt give that Picasso you happen to have laying around to your son or daughter and keep it hanging above your own fireplace.
But there is an exemptionโฆ
The taxman does not want to be seen as trying to tax things such as birthday presents. So you can give ยฃ3,000 a year in total to your children and grandchildren, and you should be able to take advantage of the allowance from previous years.
If you didnโt use your allowance in the previous tax year, you can carry it forward, but only for one tax year. This means you can give up to ยฃ6,000 in the current tax year if you didnโt use the allowance last year.ย
On top of those amounts, other gifts are allowed for weddings โ limits are ยฃ5,000 to a child of yours, ยฃ2,500 to a grand- or great grandchild or ยฃ1,000 to anyone else. You can also give away any number of ยฃ250 gifts to anyone who has had one of those bigger gifts โ however the recipient of the ยฃ250 gift cannot receive any part of the ยฃ3,000 annual exemption in the same tax year.
Can you afford to give it away?
Beating the taxman, and seeing your loved ones enjoy your generosity is appealing, but be careful. You should never give away anything you might need in later life. Nursing home care is eye-wateringly expensive, and it could be vital for you in the years to come. Tax planning and inheritance tax is a minefield.
Whatโs more, inheritance tax might not be the only issue. You cannot avoid capital gains tax by giving shares or other investments away rather than cashing them in as you will be assessed for CGT on their value on the day of the gift.
If you want to mitigate inheritance tax by giving wealth away, you need to plan carefully, and expert help could make all the difference between beating the taxman or handing him even more than is strictly necessary.
A call to us at Continuum could provide the expert advice you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable inheritance tax strategy, you should seek independent financial advice before embarking on any course of action.
Estate planning is not regulated by the FCA.
The Financial Conduct Authority does not regulate taxation advice and trust advice
Levels and bases of and reliefs from taxation are subject to change and their value depends on individual circumstances. We recommend that you seek professional advice on personal taxation matters.
