More people than ever before are calculating the value of their estates and finding they have a liability to Inheritance Tax (IHT). IHT can cost your estate thousands of pounds when you die, but with expert planning you can legitimately mitigate this tax, meaning you can pass on assets to your family as intended.
The current tax-free threshold is £325,000 for individuals and £650,000 for married couples. Anything over this amount will be taxed. Inheritance Tax is one area where a little bit of planning can pay dividends in the future.
One way of achieving this is by using your annual gift allowance before the end of the tax year. This allowance enables you to make gifts which will be exempt from IHT on your death.
Making IHT-free gifts
Each financial year you can make gifts of up £3,000 (in total, not per recipient) and if you don’t use this in one tax year, you can carry over any leftover allowance to the next year. If you do this, you have to use up all your allowance in that tax year; you can’t accumulate several years’ worth of allowance and use it up in a single gift.
Gifts of up to £250 per person per financial year to any number of people are exempt. Each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500 and any well-wisher can give £1,000. Gifts to registered charities and political parties are also exempt from IHT. There is another simple way of passing money to the next generation which allows for gifts to be made from surplus income. Conditions apply and advice would be needed to ensure that the gifts are made in the right way.
Although these sums are relatively small, utilising these where possible will gradually reduce your overall estate.
IHT in practice – Make a gift every year
Maximising the use of your annual allowances can reduce the ultimate tax liability substantially.
IHT in practice – The 7-year rule
To reduce the amount of IHT payable, many families consider giving assets away during their lifetime. These are called ‘potentially exempt transfers’. For these gifts not to be counted as part of your estate on your death, you must outlive the gift by seven years. If you die within seven years and the gifts are worth more than the nil-rate band, taper relief applies, so that if you die say within six years, the tax will be less than if you were to die a year after making the gift.
Gifts must be outright, and you can no longer benefit from them. So, if you were to gift your home, but continue to reside there without paying a commercial rent, HMRC would consider this to be a ‘gift with reservation’ and include the value as part of your estate.
IHT in practice – Gifting from surplus income
If you have enough income to maintain your usual standard of living, you can make gifts from your surplus income, such as regularly paying into your child’s savings account. To make use of this exemption, it’s essential that you keep very good records of these gifts. The gift will only qualify for exemption if it is part of a regular pattern of giving, and if you can demonstrate that you maintained your normal standard of living after making the gifts and all other usual expenditure, if you don’t, IHT might be due on these gifts when you die.
IHT in practice – Take advice
These days, more estates are likely to be subject to IHT, so taking expert advice could save your beneficiaries substantial amounts of tax. If you have queries or would like to discuss any aspect of IHT or end of tax year planning, get in touch with your adviser.
The Financial Conduct Authority (FCA) does not regulate will writing, tax and trust advice and certain forms of estate planning
Tax rates are based on current legislation for the 2020/21 tax year, which is subject to change
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