Inheritance Tax: Five things to remember when making gifts

Inheritance Tax five things to remember when making gifts

We’d all like to pay less tax; especially when it is taken away from the assets we leave behind for loved ones.

One of the easiest ways to reduce the Inheritance Tax (IHT) liability is to give gifts to family and friends whilst you are still alive. Providing you survive for at least seven years, this is an effective way of reducing the value of your estate and consequently the amount paid in IHT.

Furthermore, those who choose to take this option will get to see the benefit of those gifts whilst they are still alive.

But, giving gifts can get complicated, so we’ve outlined the five key things to keep in mind when considering this IHT-reducing strategy.

1. Everyone loves a gift

There are several types of gifts, known as exemptions which are immediately outside the estate for IHT purposes:

Gifts to your spouse/civil partner: These are always immediately exempt, regardless of value or regularity.

Annual exemption: Each year, you can gift up to £3,000. You can ‘carry over’ any unused annual exemption for one year, for a maximum of £6,000. This cannot be carried over into a third year.

Small gift exemption: You can give gifts of up to £250 to different people, without limit. Though, small gifts and your annual exemption cannot be applied to gifts given to the same person.

Wedding gifts: Each year, you may give sums of money as wedding gifts. These are IHT exempt if they are: Up to £5,000 for a child, £2,500 for a grandchild.

2. Some gifts are free… eventually

Gifts outside of the above exemptions become Potentially Exempt Transfers (PETs). These are gifts which will be free from IHT liability completely, if you are alive after seven years of giving it. In the meantime, PETs are subject to taper relief. This is a scale of IHT relief which increases in line with the time which has passed since the gift was given:

  • 0-3 years: no taper relief
  • 3-4 years: 20%
  • 4-5 years: 40%
  • 5-6 years: 60%
  • 6-7 years: 80%
  • 7 years+: No IHT due

For example, if you died within years five to six of giving the gift, 60% of the gift would be outside the estate, while 40% would remain inside the estate, potentially subject to IHT.

3. Beware gifts with reservation

Many IHT relief options apply to assets as well as cash. However, if you wish to continue using an asset after giving it to a loved one, it will not be classed as a gift, but as a ‘gift with reservation of benefit’. The most common examples of this are homes and vehicles.

The value of any assets which are used, but no longer owned, by yourself, will be included in the value of your estate for IHT purposes, no matter how long you live after giving them away.

 4. Giving gifts from income is more complex than it seems

Gifts from income are defined as ‘gifts given from surplus regular income’. For a gift to qualify it must meet the following criteria:

  • The gift must form part of your usual expenditure
  • The gift must be made from income. Therefore, gifts given from savings or capital will not count
  • You must be able to support your normal standard of living after giving the gift.

Often, proving that a gift was made from income and meets these criteria can be difficult, so it may be worth establishing a gifting routine to make the most of this exemption, if it suits your financial plan.

5. It is advisable to seek help

We all need a helping hand occasionally, and making decisions about your finances is one of the main times when employing a professional can be beneficial.

Giving gifts can bring joy to both you and your loved ones, as well as reducing the amount they will lose to IHT when you die. However, it is also important to note that, once a gift has been given, there is no recourse for changing your mind and taking back control of that money or property.

Giving gifts as part of your estate planning strategy requires careful thought, not least to make sure you can afford to do so, and the input of an Independent Financial planner can help you to make the best decisions for your lifestyle and circumstances.

For more information, contact us on 0800 612 8099 or request a call back by clicking here.