Many of us pass away with too much wealth. At least, that appears to be the government's perspective, as they impose a hefty 40% tax on any inheritance exceeding an initial allowance of £325,000. Most of us would prefer our loved ones to benefit from our hard-earned wealth rather than the taxman when we are no longer around to enjoy it ourselves.
One of the simplest ways to do that is give it away while we are still alive – but as always when tax is involved things are never quite as simple as they first appear.
What can you give?
You have the freedom to give away your wealth—whether it's cash, investments, possessions, or even your home—to anyone you choose, at any time, but there are some important details to consider regarding UK inheritance laws.
There are other reasons for ‘giving while living’ aside from potential tax benefits. The pleasure of seeing how your gifts help your beneficiaries is one of them. A second is the fact we on balance are all living longer. Die in your 90s, and your children could be in their 70s themselves, and it could possibly be too late in life to make the most of your kindness.
But the taxman will question your generosity if he thinks you are only doing it solely to avoid taxes. So, if you give away something substantial, like a house, you will need to live for another 7 years to avoid tax being owed on it.
This is of course to avoid ‘deathbed giving’.
If you die within seven years of making a gift, its value is added back into the estate for the purposes of calculating the inheritance tax liability. There is a sliding scale for those who pass away during the seven years known as taper relief.
- Less than 3 years: 0% reduction
- 3 to 4 years: 20% reduction
- 4 to 5 years: 40% reduction
- 5 to 6 years: 60% reduction
- 6 to 7 years: 80% reduction
Please be aware that the seven-year rule generally applies to gifts exceeding an individual's annual gifting allowance, which is £3,000 per year.
For inheritance tax (IHT) purposes, certain gifts above this allowance are termed potentially exempt transfers. If these gifts fall within the individual's £325,000 allowance at the time of their death, no action is required.
Your annual gift allowance of £3,000 can be carried forward one year, allowing a maximum of £6,000 to be gifted if the previous year’s allowance was unused. You can also make small gifts of £250 to as many individuals as you want (but not to someone who has received a gift of your whole annual ‘gift’ allowance).
You can give a gift to someone who is getting married or starting a civil partnership and this would not be subject to Inheritance tax. You can give up to:
- £5,000 to a child getting married
- £2,500 to a grandchild or great-grandchild
- £1,000 to another relative or friend
You can also make gifts out of unrequired surplus income. Provided you meet all the HMRC guidelines there is no limit on the amount you can gift nor any timeframe before it is outside of your estate. Grandparents paying for their grandchildren’s private education is the classic example. The rules for this exemption are complex and there are a number of HMRC guidelines which need to be followed, such as ensuring gifts must form part of normal expenditure (a regular patter of gifting), be made out of income and leave the donor with sufficient income to maintain their usual standard of living. As these gifts must be regular, you need to be committed to keeping up with making these gifts
A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.
Be careful
Gifts must truly be given away; you can’t retain any benefit from them, so you can’t for example give away title to your home and carry on living in it or keep that Rembrandt over your mantlepiece because you are looking after it for the child you gave it to. You can’t even give away that classic car and get regular rides.
However, if you meet all the HMRC rules and follow the most suitable advice, giving money away while you are alive could help keep it out of the taxman’s clutches.
But there is something else to consider.
More and more of us are living longer but needing support in our final years. Long term care is expensive, and if you can no longer afford the quality of care you want, you may find yourself at the mercy of your local authority.
Your loved ones may want to provide for you, as you provided for them, but it might not always be possible. If your generosity was used to buy a home for a young family, for example, there may be no way to provide the funds you would need to call on.
A living inheritance should be carefully planned to help ensure that you still have the financial resources you want for your own needs in later life.
Want to make “giving while living” part of your estate plan? For the expert help you need with preserving and transferring family wealth, simply call us at Continuum.
Gifts and exemptions from Inheritance Tax | MoneyHelper
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 saving strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation and trust advice or will writing.
Levels, bases and reliefs from taxation may be subject to change.
