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As it’s the season of gifting, we decided to take a look at Inheritance Tax (IHT), which can take a big bite out of your wealth when making larger lifetime gifts or when leaving an inheritance to your loved ones on death.
Unlike the Christmas jumper that’s not the right colour or fit, there’s rarely any opportunity to take back poorly planned lifetime gifts. Similarly, if you pass on significant wealth on death, the tax man is as sure to come to town as Santa.
However, if you put tax planning on your to do list, there are many ways to remove or reduce the potential tax bill. Just like Christmas shopping, you should not be leaving this until the last minute and should plan as far ahead as possible.
Here are our 12 tips for tax efficient gifting and transfer of wealth.
1) You can gift money or goods worth up to £3,000 per tax year free of IHT. If not used, this annual allowance can be carried forward for one year only, allowing a maximum of £6,000 the following year. This could make a really meaningful long term gift to a child or grandchild, as an annual premium to a JISA or pension, for example. For pension contributions, income tax relief is the icing on the IHT saving cake.
2) Gifts of up to £250 can be made to any number of people in the same tax year, as long as they haven’t already been the lucky recipient of the £3,000. That’s your fitness tracker, your high-grade headphones or your e-book sorted.
3) Gifts can be made out of income as regular expenditure, as long as you are left with enough income to maintain your usual standard of living. Take heed however, not all income is officially defined as income for this purpose. Read the small print!
4) Gifts between spouse’s bear no IHT liability in life or on death, so you can be as generous to your other half as you like, provided you are married or in a civil partnership. Tis the season of goodwill, after all.
5) For other people you love, you have an IHT nil rate band (NRB) – an amount of money you can gift without incurring an immediate liability to IHT. This NRB is currently £325,000 per individual. During your lifetime, this lasts for 7 years, just like the happy stage of marriage! After 7 years, you get a new allowance, and might want to make the next gifts to a new person!
6) If you have surplus funds, then one thing you might want to help with is getting the next generation on the property ladder. It would be nice to think the children or grandchildren will have some form of chimney of their own for Santa to come down. According to the Halifax, today’s first time buyers can need a deposit of more than £33,000.
7) If you are married or in a civil partnership and leave your wealth to your other half on death, then they can use your NRB as well as their own when their time comes. This allows up to £650,000 to be passed on free of IHT. It sounds a lot but can easily be breached with the rising value of properties and the amount people can build up in ISAs over the years (especially with a good financial adviser!). Its important to be aware however that lifetime gifts made within 7 years of death may need to be offset against the allowance also, meaning timing of gifts is as important as the last dates for Christmas post.
8) Gifts to political parties and charities are also free of IHT. I think we might well have had our fill of politics in recent months, but Christmas is often a time when we dig deep for charities and those less fortunate than ourselves. At Waverton this year, we have donated to a food bank, purchased toys for disadvantaged children and contributed to a youth run Rain Forest conservation project!
9) We all have that person in our family who we wouldn’t want to trust with too much money. Some of us have several of those! Where you don’t trust the loved one, you can instead entrust funds to a Discretionary Trust, which can hold investments for children and others until the time is right to bestow funds. The beauty of this type of arrangement is that it holds wealth outwith the estate of the people who will ultimately benefit, meaning you can pass money on to the next generation without passing the potential IHT liability down the line as well.
10) Due to the rising value of our homes, the government gifted us with a new measure to reduce the potential IHT liabilities on death – the Residence Nil Rate Band or RNRB. In 2019/20, this allows a legally recognised couple to gift up to a further £300,000 to their children free of IHT. That provides a potential IHT saving of £120,000. However, to qualify for this gift from tax man Santa, you need to meet the following conditions:
- Your property must be worth at least as much as the RNRB
- You must leave the property to direct descendants
- The allowance is reduced by £1 for every £2 that your estate exceeds £2 million.
Where you are fortunate/clever enough to have an estate in excess of £2m, you might wish to consider lifetime gifts to address this. For this purpose, you can make the gifts right up to your final breath, just like those archetypal husbands rushing off to the shop on Christmas Eve for that special gift.
11) One rule that applies to any amount or type of gift you may make, is to write it down! Just like keeping receipts for the Christmas shopping, if you want to be sure you can exercise your rights and claim your allowances. It really helps to have a record of transactions made and money parted with, to whom and when.
12) Finally, tip number 12. If all this talk of giving money away is making you as uncomfortable as too much Christmas dinner, then there is another way to reduce your IHT liability. Spend your money while you are living! I’m sure we are all having a good go at this during the festive season.
We hope you all have a wonderful Christmas and New Year, if you have any questions about this article, then please do not hesitate to get in touch.