HM Revenue and Customs reported a record high for inheritance tax receipts for the last tax year and to date they are reporting further year on year increases. This has been an upward trend over the past decade, since the inheritance tax nil rate band was frozen at £325,000.
The introduction of the residence nil rate band in 2015 has done little to stem this tide as rising house prices have fueled the increase in IHT receipts, almost doubling between 2010 and 2018.
Utilising legitimate means to reduce our potential IHT liabilities is therefore essential if we want our beneficiaries to benefit from our wealth rather than the HMRC.
One way to do this is through gifting.
Here are five things you need to know about giving your money away, while still staying within the IHT rules.
The gifting allowances/exemptions
- Gifts between spouses or civil partners are free from inheritance tax
- Individuals have an annual gifting allowance of £3,000, known as the ‘annual exemption’. If the full annual exemption isn’t used in one tax year, the remainder can be carried over to the following tax year (but only that year).
- Small gifts of up to £250 can be made to as many people as you wish, however you can’t use your annual exemption and small gift exemption on the same person in the same year.
- Wedding gifts are free from inheritance tax – up to £5,000 for your child, up to £2,500 for your grandchild, or up to £1,000 to others.
The seven-year rule
You can give money, using different methods other than under the above exemptions. These gifts are known as potentially exempt transfers (PET) and only become inheritance tax-exempt if you are alive seven years after the gift is made. If not, then the value of the gift will be included in your estate and the person receiving that gift may well have to pay any inheritance tax due.
A sliding scale or taper applies, the longer a person lives after gifting the money. So, where someone survives between 3 and 7 years after making substantial gifts, taper relief, in some circumstances, can reduce the rate of Inheritance Tax payable.
Gifting from income
If a person has enough income to maintain their usual standard of living, they can make gifts from their surplus income, such as regularly paying into a child’s savings account. However, the rules are complex; for example, the gifts must be regular, meaning there has to be a commitment to keep making them. Good records should be kept of these gifts, to prove they fall outside of an estate for inheritance tax purposes
Gifts other than cash
Gifts are not confined to cash; other assets may also be given away. This can apply to a property. It has to be remembered that any gift must pass out of a person’s control or use to fall outside of an estate for inheritance tax purposes. A person could not gift away a holiday home and then continue to use the property without paying, as this would cause them to benefit during their lifetime.
Gifts to Charity
Gifts to UK registered charities are exempt in their own right but if you leave 10% or more of your net, Inheritance taxable estate to charity, the rate of tax payable on the balance can reduce from 40% to 36%. Whilst your remaining beneficiaries will receive less, the net outcome can be as much as £10 going to charity for every £1 the remaining beneficiaries don’t inherit.
We would urge extreme caution for anyone considering gifting large sums away, especially where there is no income stream to replace it. We strongly advise that before taking any action you fully consider your own needs and financial situation, not just as they are now but how they might be in the future.
Remember, once a gift is given it is gone, you have no control over the money or how it is spent. There may be other ways to help out family without handing over money you may not get back if needed. A Lowes Consultant can advise you in this respect.
Estate and tax planning is a complex area, getting professional advice can help you avoid several big pitfalls when making a gift. For a free initial consultation with a Lowes Consultant:
Call: 0191 281 8811
To request a copy of our free guide ‘What to consider when you’re thinking about passing on your wealth’, call us on 0191 281 8811.
The Financial Conduct Authority do not regulate on trusts or estate and tax planning.