Gifting, to mitigate Inheritance tax?
Many of us are making gifts this festive season echoing the Three Wise Men, the biblical magi who were distinguished foreigners in the Gospel of Matthew, and the Christian tradition who visited baby Jesus. They bestowed on him gifts of gold (a symbol of kinship on earth) frankincense (as a symbol of deity) and myrrh (as a symbol of death) gifts to represent meaning in the spiritual realm. These gifts were surely not part of their individual estate planning but it is a topical time of the year to consider the impact gifting can have on one’s Estate for inheritance tax purposes.
With HMRC receiving the highest receipts from Inheritance tax than ever before. Currently standing at 5.2 billion due to the government keeping the nil rate band of £325,000 for inheritance tax static since 2009 and frozen until 2028 it is beneficial for individuals to consider gifting to mitigate IHT if they intend on maximising the transfer of their accumulated wealth on death to loved ones.
When clients are making Wills we find many are unaware of the strategies that exist to mitigate IHT and that can be easily utilised. Making the most of gift allowances means you can financially help your loved ones now and reduce the value of your estate for Inheritance tax purposes on death. A careful approach must be followed to ensure that on death an individual’s nil rate band of £325,000 is available and any other exemptions and reliefs that are applicable.
The starting point is to fully utilise the annual exemption. This allows you to gift £3,000 each year (or £6,000 per couple) tax-free to one or more people. Any unused allowance can be carried forward to the following tax year.
Also to be considered is the small gift allowance which allows you to make as many gifts as you want of up to £250 per individual, as long as you haven’t used another allowance in favour of the same individual. A tax-free wedding/civil partnership gift can also be given to your child of £5,000 and £2,500 to a grandchild /great-grandchild, and £1,000 to anyone else. These are celebratory gifts and help to distribute wealth to younger members of your family.
We find in practice that most clients making Wills are unaware of the gifts out of income exemption. This allows an individual to make gifts out of surplus income as long as certain conditions are met. The gift must be part of your normal expenditure and not from capital and not affect your standard of living. We most commonly saw clients who could utilise making gifts out of surplus income during Covid. Large amounts of money had accumulated in individuals current accounts from final salary pensions and other sources of income which they were unable to spend. It is important that careful records of gifts are kept to assist your executor when they are dealing with your estate on death.
After employing the above methods we then explore for larger gifting the seven-year rule. This provides that a gift can be given as a potentially exempt transfer and as long as you survive for at least seven years after making that gift it falls outside your estate for inheritance tax purposes. It is important to note that you cannot continue to benefit from the gift. Careful consideration should be borne in mind of the gift with reservation of benefit rules and deliberate deprivation of assets before large gifts are given and professional advice should be sought before making any large gift.
It is important to note that gifts between spouses and civil partners and gifts to charities and political parties are exempt from IHT.
It is always important to seek appropriate professional advice from a solicitor and financial adviser before putting an estate plan in place.
Our highly experienced inheritance tax specialists can assist you in preparing a plan for a tax-efficient future. Contact us to discuss your individual circumstances in greater detail on 0808 271 9413 or request a call back online.