The beauty of the holiday season lies in its spirit of giving โ a sentiment that echoes long after the last present is unwrapped, making every thoughtful gesture the gift that truly keeps on giving.
At Continuum we are looking at how gifting your wealth while you are alive could help stop the taxman taking it when you are gone.
The Inheritance Tax (IHT) burden
Increasing personal wealth, from property price inflation, pensions and investments means that every year, more families find they have a bill to pay when someone dies.
It could be a large bill. With a standard 40% tax rate applied to estates exceeding the tax-free threshold of ยฃ325,000 (or ยฃ500,000 if the main residence is left to direct descendants), the financial impact of IHT can be significant.
But by making strategic gifts during your lifetime, you could lower the value of your estate, and possibly keep it out of the taxmanโs clutches.
But as usual with tax, things are not quite that simple. Understanding the rules and allowances that govern gifting is crucial for effective planning.
The Seven Year Rule
You can give away money and property at any time, but HMRC are fully aware of the potential for deathbed giving for avoiding tax obligations. So there is a seven year rule.
If you make a gift, it may help you mitigate IHT. These are known as Potentially Exempt Transfers (PETs).
They are only potentially exempt, because if you pass away within seven years, the value of the gift may be added back into your estate for IHT purposes. However, taper relief applies if the gift was made more than three years before your death, reducing the amount of IHT due on a sliding scale.
| Years Between Gift and Death | IHT Rate Applied to Gift |
|---|---|
| 0-3 | 40% |
| 3-4 | 32% |
| 4-5 | 24% |
| 5-6 | 16% |
| 6-7 | 8% |
| 7+ | 0% |
So, if you want to mitigate IHT, could look to give away your wealth as soon as possible. But what if you donโt want to give away your money while you still might be able to use and enjoy it?
Fortunately, there are some other allowances.
The Annual Gift Allowance
Everyone can gift up to ยฃ3,000 each tax year without it being added to the value of their estate. This is known as the annual gift allowance. If you donโt use this allowance in a given tax year, it can be carried forward for one year, allowing for a potential tax-free gift of ยฃ6,000.
Small Gifts Exemption
You can make unlimited small gifts of up to ยฃ250 per recipient each tax year (although not to anyone who has already received a gift of your whole ยฃ3,000 annual exemption). This exemption is a simple and efficient way to pass on smaller sums to family members or friends.
Gifts for Weddings or Civil Partnerships
Special allowances exist for wedding or civil partnership gifts. You can gift up to:
- ยฃ5,000 to a child,
- ยฃ2,500 to a grandchild or great-grandchild,
- ยฃ1,000 to anyone else.
These gifts are exempt from IHT, provided they are made before the ceremony.
Gifts from Surplus Income
Regular gifts made from surplus income are another valuable exemption. You need to have an income โ you canโt give away savings. Gifts must be part of a pattern of regular giving and should not reduce your standard of living. Examples include paying for a grandchildโs school fees or contributing to a childโs mortgage.
Using Trustsย
In addition to direct gifting, placing assets in a trust can be a tax-efficient way to remove them from your estate. Trusts allow you to set conditions on how and when beneficiaries receive the assets, offering greater control over their distribution. However, trusts come with their own set of rules and may attract their own tax liabilities, making professional advice essential.
What could go wrong?
While gifting is a powerful tool, itโs not without risks: if your beneficiaries are not to fall foul ofย a suspicious tax inspector, youโll need to keep detailed records of gifts made, including dates and amounts.ย
Not all gifts are exempt, and failing to stick to rules could result in unexpected tax liabilities.
Getting expert advice about gifting, and all other aspects of inheritance tax planning is essential.
One simple way to get the tailored advice you need is to call us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial adviceย or a recommendation to suitable tax mitigation strategy. You should seek advice from a qualified tax professional regarding your own circumstances before embarking on any course of action.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
The Financial Conduct Authority does not regulate taxation and trust advice, school fees planning or will writing.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available.
The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk.
