Making gifts to reduce Inheritance Tax liability

Giving away your wealth during your lifetime is one of the easiest ways to reduce a future inheritance tax (IHT) liability and can also be an effective way of saving your heirs a significant IHT bill.

Table of contents

Making gifts to reduce Inheritance Tax liability

Giving away your wealth during your lifetime is one of the easiest ways to reduce a future inheritance tax (IHT) liability and can also be an effective way of saving your heirs a significant IHT bill.As well as watching your wealth being enjoyed by your loved ones, for every £10,000 moved out of your estate whilst you are living, it could save them £4,000 in tax.

Gifts to reduce inheritance tax liability

Here’s how to make use of your options:

1. Know your allowances and take advantage of them every year

Currently, you can have an annual gifting allowance of up to £3,000. This can be divided up into any number of smaller gifts, and you can also make use of any unused gifting allowance from the previous tax year. For a couple this could potentially mean removing a maximum of £12,000 from their joint estate immediately.You can make small gifts of up to £250 to as many people as you like, however the same beneficiary cannot receive a small gift and also any of your annual gifting allowance in the same tax year.Depending on your relationship to the bride and groom, you can also make wedding gifts of between £1,000 and £5,000. It is important to keep records for your executors so that they can prove how you have used your allowances. An annually completed form IHT403 will assist with this.

2. Investing in your child’s or grandchild’s future

One of the most generous of tax breaks is paying into someone else’s pension. If over a number of years you placed £10,000 into your child’s pension, (using your £3000 per year allowance) with basic rate tax relief it would be grossed up to £12,500.In addition, if they are a higher rate taxpayer they can then claim a further £2,500 in their tax return. The sum is then also tied up until they are at least 55, so you know it will not be wasted. This is a considerably more tax-efficient way of leaving £10,000 rather than just in your estate. Left there it would reduce to just £6,000 following the IHT liability.You could also be saving into a tax-efficient investment on behalf of a grandchild such as a Junior ISA. This could help them in the future with university or house purchase costs. The investment could enjoy the ‘gifts from income’ exemption if it is a regular gift and is taxed from your income. Reducing your IHT liability and at the same time, helping your grandchild prepare for their future.This gifts out of normal income rule is not limited so in fact a person with a large pension income of say £100,000 could gift £50,000 per year if they did not need the money. You need to be careful to record your intention to make the gift regularly and it must come from income and not capital (5% income from investment bonds is not counted as this is deemed a return of capital)

3. Helping your child or grandchild onto the property ladder.

With the average first-time buyer needing a £29,218 deposit, any help to get onto the property ladder will be appreciated. Paying their own mortgage instead of someone else’s, will assist them in the long term. A gift of a lump sum will be considered a potentially exempt transfer and fall under the 7 year rule.

4. Giving away your valuables

The value of your belongings, such as art or jewellery, will form part of your estate. Giving them away during your lifetime may give you the pleasure in seeing someone else enjoy them, as well as reducing a future liability. Dependent on the items value it could however take seven years for it to leave your estate for IHT purposes.

5. Leaving money to charity

Any gifts you give to registered charities during lifetime or on death are exempt from IHT, immediately taking them outside of your estate for IHT purposes. There are also tax benefits to giving in your lifetime. Gift aid on donations means every £80 you give to charity is grossed up to £100. If you are a higher rate taxpayer you are able to claim a further £20 in your tax return.You could also give qualifying investments such as shares or unit trusts to charity. You will not then have to pay any Capital Gains Tax on them. If you leave at least 10% of the net chargeable value of your estate to charity on death it will reduce the IHT rate charged from 40% to 36%.  So for £100,000 liability if 10% was gifted the tax would be £32400 instead of £40,000. The beneficiaries would be left with £57600 instead of £60,000.Making gifts to reduce inheritance tax liability are a quick and effective solution to a potential IHT problem.WARNING - Be careful about making large gifts of assets or capital as if your children get divorced a lot of that money could get lost - this can be solved using trust so please call us for help

Join our Newsletter

Subscribe and get the latest updates about inheritance tax and Estate Planning into your mailbox.

We help people with over £1 million in current assets pay ZERO in UK inheritance tax

One stop comprehensive specialist advice - Tax, financial planning and legal advice service with 18 years experience.

What our clients say
Read our 118
    

"It is gratifying to finally come across an adviser who gives sensible ongoing advice which is very client focused."

Frank Hibberd

Retired gentleman

"It is nice to know that we can now be certain that our daughter will inherit our money without giving a large slice of it to the government ."

Tony & Sue Perriss

"Everyone's situation is different but having an initial discussion with Charles has really helped me personally navigate what can be a daunting subject."

Bobby Chadda

"I particularly want to thank you for the open and transparent manner in which you have serviced my tax planning needs since I first met you seven or so years ago. In arranging my tax planning through you, I have confidence"

Michael Mahon

Retired gentleman

"Charles was really helpful from the outset and quickly clarified our situation for us... I have used Bluebond for  IHT and other tax advice and they have been very helpful with both. Charles is a very experienced and knowledgeable individual and I highly recommend Bluebond's services."

Sam Attenborough

Retired gentleman

I have used Bluebond for setting up a discretionary trust for my children as well as inheritance tax and estate planning for my home and  other properties. Having searched for years, it was only after meeting and speaking with Charles that I felt confident enough to take these next steps, and I'm very glad I did. His ability to explain complex issues in simple terms and walk you through every step of the process is quite simply unparalleled.

Imran Qureshi

Excellent and comprehensive advice concerning all things financial in one place. Enthusiastic, Educational, Expert, value oriented, Professional and Polite are adjectives that come to mind as well as great attention to detail.

Deirdre Buckley

Inheritance tax is a minefield. Charles de Lastic of Bluebond Tax Planning is the best in the business at helping you to chart the path that is right for you to ensure your estate is structured in the most tax efficient manner.

Nicholas Dickinson

Charles provides clients with valuable insights that clearly demonstrate expertise built over the years. Charles and his team guided us through a estate planning journey and then addressing complex Inheritance Tax matters. They have been very transparent with their advice and cost. Overall an excellent service. Highly recommended

Shailesh Karia

The information contained in this web site is for UK consumers only.  Like most firms of solicitors and accountants, Bluebond Tax Planning is not regulated by the FCA. The content of this website does not constitute FCA regulated financial advice and all content is provided for general information purposes only. Bluebond is not responsible for any action you may take as a result of information on this site. All advice will be delivered on a personal basis once we fully understand your situation and our client agreements have been signed.

Copyright © 2024
Copyright Notice
Legal Disclaimer
Terms & Conditions
Privacy Policy