Lifetimes gifts can a very important tool when it comes to tax planning. Currently Inheritance Tax (“IHT”) is at a rate of 40% so understandably, many people look to reduce the value of their estate.
There are many ways during your lifetime in which you can reduce the value of your estate in order to reduce the amount of IHT payable on death:
Making use of the annual exemption
Each individual can gift up to £3,000 per year, free of any IHT. Gifts can be made to one person or split between a number of people. If the full £3,000 is not gifted, it can be carried forward to the next year resulting in being able to gift up to £6,000 tax free (but only for one year).
Gifts out of income
If you have “surplus” income after you have paid your usual living expenses, you can make regular gifts out of your income for example, paying school fees for a grandchild or paying towards a child’s mortgage monthly.
Gifts out of income will only be exempt if:
• The gift is made out of income (as opposed to capital)
• You have sufficient income after making the gift to maintain your usual standard of living ie you have a surplus after paying all of your living expenses
• The gift is made regularly ie monthly or quarterly.
HMRC will expect to see evidence that the payments were made out of “surplus” income so you should always keep a record of your income, expenditure and proof of the regular pattern of gifting if you are to make use of this tax relief.
Provided you can prove regular expenditure out of income, there is no limit on the value or amount of gifts you can make under this exemption and the amount does not need to be the same each time provided you can prove a settled pattern of gifting over a period of time.
Small gifts
You can make as many gifts up to the value of £250 as you wish, to whoever you like each year unless another exemption has been used for the same person.
Gifts to exempt beneficiaries
Gifting to a charity is completely exempt from IHT.
Gifting to your spouse or civil partner can also be exempt from IHT provided you both have the same domicile for IHT purposes.
Gifts on marriage or civil partnership
Gifts can be given with regard to a marriage or civil partnership and vary depending on your relationship to those getting married.
Each tax year you may give:
• Up to £5,000 to a child
• Up to £2,5000 to a grandchild
• Up to £1,000 to any other person - there is no family relation required
The timing of the gift is important – it must be made on or before the day of the marriage but not after. You must be careful however, if the marriage fails to go ahead, the exemption will fail.
Potentially exempt transfers - The 7 year rule
If you make a gift of value more than the above amounts, it could be subject to IHT. If however you survive a period of 7 years from making the gift, it will fall outside of your estate for IHT purposes.
If you do not survive 7 years but you survive a period of 3 years, taper relief is available to reduce the amount of tax payable and reduces the IHT by 20% for each year you survive past the 3 years.
If a gift becomes taxable, the value of the gift can be offset against an individual’s NRB but this does mean you have less NRB to use against the value of your estate.
The law regarding lifetime gifting can be complicated. If you would like to discuss your options, please contact our Private Client department on 01935 382 680.
PardoesSolicitors