Christmas is a time for giving.
But giving can be about much more than the latest computer games and pairs of socks. It can form a key part of your estate planning – the important task of keeping your inheritance tax liabilities to a minimum.
Why the taxman takes an interest in your gifts
Making a cash gift to your family while you’re alive can delight and benefit your loved ones immediately. But it can also be a way of reducing the size of your estate after you pass on, and hence the level of Inheritance Tax (IHT) that will be deducted from it.
IHT is something to avoid if you possibly can, because it will take a big chunk out of what you leave behind. The first £325,000 of anything you leave is exempt. Anything above this is taxed at 40% before it can be passed on to your loved ones.
So, if your estate was worth £500,000, the first £325,000 wouldn’t be taxed. But £175,000 would be taxed at 40%.
However, it is also worth taking into consideration the residence nil-rate band, currently set at £125,000, which could effectively increase the exempt amount to £450,000 subject to meeting qualifying conditions.
It is possible to transfer a percentage of any unused nil rate band to the surviving spouse / civil partner, this would potentially increase the nil rate band for IHT purposes.
The taxman will therefore take a close interest in any generosity. If they think it is simply designed to reduce the value of what you leave for IHT purposes they might consider that the cash you give is still part of your estate, and levy IHT accordingly.
How giving can help
You can give away any amount of money you like. It is how and when you give it that counts.
It will be classed as part of your estate if you pass away within seven years and IHT will be applied. However, if you pass away 3 years after gifting money taper relief will apply and IHT will be applied at a lesser rate. This is known as the seven-year rule and was intended to prevent ‘deathbed giving’. This of course would deprive HMRC of the IHT share of your wealth at the last possible moment.
Giving away cash when we still have plenty of life in us could beat the IHT rules – but none of us know when we have seven years left, and we can’t all afford to be generous early.
Fortunately, HMRC has provided some other concessions.
This is an allowance which allows you to give a limited amount each year. For 2018/19, this is £3,000, and if you have not used last year’s allowance, you can gift £6,000 this year. However, any amount carried forward is dependant on the current years allowance being used in full.
Small cash gifts are also exempt. Each year you can give up to £250 to as many people you like and there will be no inheritance tax implications.
Gifts in consideration of marriage
There is another allowance for this special occasions. You can give your child a gift of up to £5,000 as a wedding or civil partnership gift. Grand Parents can donate £2,500 and other friends and relatives can donate up to £1,000.
Consider making regular payments
Regular payments made from income, rather than your savings are not considered as part of your estate. They therefore do not count towards inheritance tax. This might make it more tax-efficient for you to give your children a regular monthly payment to help with their mortgage, rather than giving them a cash sum to use as the deposit.
But don’t give more than you can afford
If you want to give money to your family members you must consider your own financial future first. Your need for an adequate retirement income, and one which can cover the potential cost of long-term care must be considered first.
If you are thinking about giving away cash, you might want to get some advice from the Continuum team.
We are looking forward to hearing from you. But in the meantime, let us wish you a Merry Christmas, and a Prosperous New Year.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate Taxation & Trust advice & will writing.
Tax rates apply for 2018/19 tax year only.
yourmoney.com – Gifting money to children: what parents need to know – 17th August 2018
moneyadviceservice.org – Gifts and exemptions from Inheritance Tax