Most people don’t like to think about inheritance tax as it’s a tax that your beneficiaries potentially pay when you die, but it is hugely important to plan your affairs in order to minimize any tax that is due.
One option is to reduce the size of your estate and therefore any potential IHT bill, by giving away or gifting your assets during your lifetime.
Given the current increase in the cost of living, I have had a few discussions with clients where parents are wanting to help their children financially, and asking how they could best do this.
This blog looks at the gifts that can be made regularly, to reduce the size of your estate, whilst helping the younger generation. Over time these gifts do add up and are a way of passing on family wealth at a time when the family may be most in need of the help.
Gifts are categorized into 2 categories – those that are tax free immediately and those which drop out of your estate after a period of time – typically 7 years.
Tax free Gifting
Each year you can make gifts up to £3,000, and if you don’t use your allowance then you carry it forward for one year.
You can also make as many small gifts of up to £250 per person as you like in a year.
If you have family getting married, then you can make a tax free gift of £5,000 for your children, £2,500 for your grandchildren, or £1,000 for other people.
These are all called Lifetime Gifts and can be useful to help family with education costs, payments into Junior ISA’s or Lifetime ISAs for family, or just to help the younger generation with the cost of living.
Gifts to charities and political parties are usually also tax free.
Gifts out of Surplus Income
In addition to the above, if you give away surplus income, then these gifts can be tax free. The key here is to show that the income is surplus to your requirements, and not needed to maintain your standard of living. This would generally mean making regular gifts out of your regular income.
Potentially Exempt Transfers – the 7 year Rule
Other gifts, not meeting the above criteria, are called “potentially exempt transfers (PETs)”. They are potentially exempt as they will be free from IHT if you survive for 7 years having made the gifts. If you die within 7 years, then there will be IHT due on the value of those gifts, but how much depends on the length of time you did survive having made the gifts. The rules around PET’s are very complicated and detailed individual advice would be needed.
The key to inheritance tax planning is to start early. Using gifting is one way to help reduce your final IHT bill, but it is always advisable to sit down with your accountant and financial advisor and make a plan!