Making gifts to reduce inheritance tax liability

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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.

Here’s how to make use of your options: 

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.

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)

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.

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.

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

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