How giving gifts can benefit you
First published 19 March 2014 • Updated 13 March 2018
Inheritance tax is tricky. You want to make sure your loved ones benefit from your estate without the lion’s share going to the taxman. Here’s what you need to know.
One of the benefits of becoming more wealthy is the ability to give gifts to our loved ones. But these gifts can have a liability to inheritance tax if we die within a seven year period of making the gift. We look here at how to use gifts not just to give pleasure but also as an integral part of an estate planning strategy.
“If your estate on death exceeds the nil rate band, the excess will normally be taxed at 40 per cent. That’s a big slice of your hard-earned assets going straight to the taxman”
Planning to minimise the amount of inheritance tax (IHT) payable on your estate when you die is something that should be a core part of your financial planning. Anything you leave to a spouse or civil partner is free of IHT and, in addition, we each have an IHT free allowance on death which currently stands at £325,000. This is known as the nil rate band, and any unused nil rate band can be transferred to your spouse or civil partner on your death if you leave your estate to them – so if, for example, you leave everything to your spouse, they will have a tax-free threshold of twice the prevailing nil rate band when they die.
If your estate on death exceeds the nil rate band, the excess will normally be taxed at 40 per cent. That’s a big slice of your hard-earned assets going straight to the taxman.
Making gifts is one way of reducing the value of your estate, but it should be remembered that any gift you make within seven years of your death may well count as remaining in your estate, for IHT purposes. What happens in practice, in the event of death within the seven years, is that the value of the gift is the first part of the estate to be set against the nil rate band when calculating IHT. The tax due on any lifetime gift in excess of the nil rate band reduces over the course of the seven years in a process known as taper relief.
But not all gifts will be included in the IHT assessment. Each individual has an annual gift allowance of £3,000 – so that’s the total you can give away in a year without incurring an IHT liability. On top of that, you can gift up to £250 per person per year to any number of people.
In addition to the annual allowances, there are a number of other special allowances. Wedding gifts are exempt up to a certain value – £5,000 from a parent, £2,500 from a grandparent and £1,000 from anyone else. Gifts to charity and to political parties are also exempt.
There is another less well-known gift allowance for those who have surplus income, allowing you to set up a regular pattern of gifts. This must be done properly: you must be able to demonstrate firstly that the gifts are being made from surplus income (excluding investment income) and secondly that you have set up an established pattern and intend to stick to it. Good record keeping is essential if you want to take advantage of this allowance as your gifts may come under scrutiny when your estate is being assessed for IHT.
An important point to remember if you are looking at making a gift of an asset such as property is that you mustn’t continue to benefit from the asset after you have given it away – you mustn’t continue to live in a house rent-free when you’ve passed it on to your children, for example. In such an instance, the gift will be considered as a “gift with reservation of benefit” and will still be included in your estate, however long ago you made the gift.
Speak to a financial adviser about the best way to minimise inheritance tax.
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About the author
Carl Lamb Founder and Managing Director of Almary Green Investments Ltd, Carl is passionate about delivering a quality service to clients.
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