Gifts to avoid Inheritance Tax

There are a wide range of gifts that can be made to reduce your inheritance Tax liability while you are alive as they are classed as Exempt gifts. These gifts are different to Potentially Exempt Transfers as  there is no 7 year waiting period for them to become effective.

At Bluebond Tax Planning, we provide our clients with a comprehensive solutions to all the legal,tax and financial planning elements, which is essential to provide you with the most suitable IHT advice

Inheritance Tax Gifts Exemptions

You could consider these as an effective, albeit limited, way to reduce your estate and therefore the eventual inheritance tax liability.  However, these must be outright gifts and so you should ensure that they would not affect your income or security as you will forego the right to the income or capital in the future.

We always advise you against making large gifts of over £50,000 as in the event of a divorce of one of your children 50% of this money could be lost to your family.

Inheritance Tax Gifts Exemptions

You could consider these as an effective, albeit limited, way to reduce your estate and therefore the eventual inheritance tax liability.  However, these must be outright gifts and so you should ensure that they would not affect your income or security as you will forego the right to the income or capital in the future.

We always advise you against making large gifts of over £50,000 as in the event of a divorce of one of your children 50% of this money could be lost to your family.

Annual Gift Exemptions

  • Annual £3,000 exemption – This exemption should be used by most people who have an inheritance tax problem provided the capital is liquid and not tied up in property. The amount is per person and so each spouse can make a gift of £3000 per financial year.
  • Any part of this exemption not used in one year can be carried forward to the following year only. However, the later year’s exemption must be used completely before using the part, which has been carried forward.
  • For people with large IHT problems a gift of £3000 a year will not have a large impact, consider that a married couple can gift £6000 a year and over 15 years this would place £90,000 outside of your estate thus saving £36000 in inheritance tax.
  • Make sure the money does not come from capital or the 7 year rule will apply if its over £3000 a year. Other gifts over £3000 per year from capital made directly are Potentially exempt transfers which fall back into your estate if you do not survive 7 years after making the gift.

Annual Gift Exemptions

  • Annual £3,000 exemption – This exemption should be used by most people who have an inheritance tax problem provided the capital is liquid and not tied up in property. The amount is per person and so each spouse can make a gift of £3000 per financial year.
  • Any part of this exemption not used in one year can be carried forward to the following year only. However, the later year’s exemption must be used completely before using the part, which has been carried forward.
  • For people with large IHT problems a gift of £3000 a year will not have a large impact, consider that a married couple can gift £6000 a year and over 15 years this would place £90,000 outside of your estate thus saving £36000 in inheritance tax
  • Make sure the money does not come from capital or the 7 year rule will apply if its over £3000 a year. Other gifts over £3000 per year from capital made directly are Potentially exempt transfers which fall back into your estate if you do not survive 7 years after making the gift.

Spouse Gift

Gifts from one spouse or civil partner to another are always immediately free of inheritance tax. There is no limit as to the amount of the gift between spouses.

Grandparents Gift

Each grandparent has an allowance of £2,500 in consideration of marriages of grandchildren. In this case, if the gift is to be effective for inheritance tax purposes, it has to be made before the wedding and of course, the wedding has to happen.

Parents Gift

Each parent has a gifting allowance of £5,000 in consideration of the marriage of their children. It has to be gifted before the marriage and the marriage has to take place.

Charity Gifts

All gifts to registered charities are immediately exempt from inheritance tax. The same occurs for gifts to charities in your Will.

Other Gifts

  • Gifts for national purposes, political parties, housing associations and certain transfers to employee trusts are also free of inheritance tax.
  • You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

Gifts out of Normal Income

  • This is a very under utilized allowance but is very useful for people who have a higher income than they use on a normal basis. These gifts must be regular and habitual and the intention to make them regularly should be recorded in writing, signed and witnessed. The document should then be kept with your Will.
  • Any income that is potentially taxable for income tax can be used including income from investments or property. Be careful as the funds must be from income and not capital.
  • The regular gifts of income should also not affect your standard of living and so producing an income and expenditure breakdown is also useful in the event the gifts are challenged by HMRC.

Keep a written record of all regular gifts made

It is important to keep a written record of all gifts made. If applicable, advise your accountants of them so that they can be correctly dealt with from a tax and reporting point of view. This will also ensure you should benefit from any available relief.

  • Record your income and expenditure and keep bank statements and tax returns to prove the gifts are easily affordable and do not affect your normal standard of living.
  • Do this annually to prove the money came from income. (Take care it’s not investment bond income as that is return of capital). Basically, its income if income tax is due on it.
  • Document the reason and intention of the gift and specifically state it is not a loan.
  • State it is to be made regularly (ideally monthly as the gift is immediately exempt) and have that document signed and witnessed and kept with your Will.

Gifts into Trusts

Gifts into trusts are classified as Chargeable lifetime transfers in that should the gift exceed £325,000, tax is immediately payable at 20% on the excess.

Do not make gifts into a trust without proper and experienced advice as merely making gifts in the wrong order can potentially cause an increased tax liability.

Never make a gift of any part of your main residence without taking good advice. Normally once income tax as been paid on the rental income and Capital Gains Tax is applied to the growth of the percentage gifted this is not worthwhile.

Spouse Gift

Gifts from one spouse or civil partner to another are always immediately free of inheritance tax. There is no limit as to the amount of the gift between spouses.

Grandparents Gift

Each grandparent has an allowance of £2,500 in consideration of marriages of grandchildren. In this case, if the gift is to be effective for inheritance tax purposes, it has to be made before the wedding and of course, the wedding has to happen.

Parents Gift

Each parent has a gifting allowance of £5,000 in consideration of the marriage of their children. It has to be gifted before the marriage and the marriage has to take place.

Charity Gifts

All gifts to registered charities are immediately exempt from inheritance tax. The same occurs for gifts to charities in your Will.

Other Gifts

  • Gifts for national purposes, political parties, housing associations and certain transfers to employee trusts are also free of inheritance tax.
  • You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

Gifts out of Normal Income

  • This is a very under utilized allowance but is very useful for people who have a higher income than they use on a normal basis. These gifts must be regular and habitual and the intention to make them regularly should be recorded in writing, signed and witnessed. The document should then be kept with your Will.
  • Any income that is potentially taxable for income tax can be used including income from investments or property. Be careful as the funds must be from income and not capital.
  • The regular gifts of income should also not affect your standard of living and so producing an income and expenditure breakdown is also useful in the event the gifts are challenged by HMRC.

Keep a written record of all regular gifts made

It is important to keep a written record of all gifts made. If applicable, advise your accountants of them so that they can be correctly dealt with from a tax and reporting point of view. This will also ensure you should benefit from any available relief.

  • Record your income and expenditure and keep bank statements and tax returns to prove the gifts are easily affordable and do not affect your normal standard of living.
  • Do this annually to prove the money came from income. (Take care it’s not investment bond income as that is return of capital). Basically, its income if income tax is due on it.
  • Document the reason and intention of the gift and specifically state it is not a loan.
  • State it is to be made regularly (ideally monthly as the gift is immediately exempt) and have that document signed and witnessed and kept with your Will.

Gifts into Trusts

Gifts into trusts are classified as Chargeable lifetime transfers in that should the gift exceed £325,000, tax is immediately payable at 20% on the excess.

Do not make gifts into a trust without proper and experienced advice as merely making gifts in the wrong order can potentially cause an increased tax liability.

Never make a gift of any part of your main residence without taking good advice. Normally once income tax as been paid on the rental income and Capital Gains Tax is applied to the growth of the percentage gifted this is not worthwhile.

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FAQ

When should I start making gifts?

Inheritance tax planning should be started as soon as possible but ensure you have a comprehensive plan before gifting money away. For instance, your children could be better off if you use the money to fund some estate planning trusts and put Life insurance into place to pay all the potential tax instead of merely reducing the amount payable.

If I can afford it, is it simply not easier to gift a large sum to my children and live the required 7 years?

Yes it may be simpler but of course your children then carry the risk if they get divorced or one spouse has a business that goes bankrupt. It is usually better to protect the gift against these issues using Trusts and your children could still get the same amount.

If I make a large gift directly to my children is it all classified as a Potentially Exempt Transfer?

If you have not made use of your £3000 a year allowance this tax year or the previous tax year then should you die within the 7 years £6000 will not form part of the PET.

Will my gift be reduced for Inheritance tax after 4 years due to Taper relief?

It depends on the size of the gifts. – Taper relief is only applicable to value of gifts which exceed the Nil Rate Band over a 7 year period. If you gifted £200,000 in year 1 and then £300,000 in year 2 and then died in year 6 taper relief would apply to£175,000 (£500K - £325K) provide the NRB was still £325K.

Can I make a gift using the regular gifts out of normal income rules as I get 4% a year income from an Investment bond?

No – Income from an investment band is classified as return of capital which is why withdrawals of up to 5% a year is possible over 20 years without payment of income tax. As it is return of capital you cannot use this money to gift away. It is possible to use it to fund a Life insurance policy to pay the potential inheritance tax.

I want to pay for my child’s wedding – Will that be free of Inheritance tax?

Each parent can currently gift £5000 each to a child for a wedding (over and above the usual £3000 allowance). Any gift in excess of that sum would be classed as a Potentially Exempt Transfer. This is fine provided you live the required 7 years and have not made a gift into a Trust in the previous 7 years. If you have that may incur a potential tax liability on that gift into the Trust if you do not live 7 years from the date of the wedding gift.

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.

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