When you’ve worked hard and invested carefully to build your wealth, you want to look after it. That’s why it’s important to plan for your wealth preservation and the eventual transfer of that wealth.
If you’re considering making a gift to someone, there are a few things you need to know about Inheritance Tax. Gifts can be tax efficient, but there are some rules that you need to follow.
Inheritance Tax is a tax that is levied on the estate of a person who has died. The estate is the value of all the property and assets that the person owned at the time of their death (with some exceptions for certain business assets and pension funds). Inheritance Tax is charged at 40% (tax year 2022/23 – a UK tax year runs from 6 April to the following 5 April) on anything above the IHT threshold, which is currently £325,000. Although, if you are married or in a civil partnership you can have a combined allowance of £650,000.
There are some gifts that are exempt from Inheritance Tax, such as gifts to your spouse or registered civil partner, or gifts to registered charities. However, you can also mitigate the amount of Inheritance Tax that your family may have to pay by making use of the annual exemption and also carrying forward any unused annual exemption from the previous year.
In April 2017, an additional inheritance tax allowance was introduced called the ‘residence nil-rate band’.
To qualify for this allowance, you must pass on your main residence, or the sale proceeds of your former residence, to your children (including adopted, foster or stepchildren) or grandchildren when you die. For the 2022/23 tax year, the maximum RNRB is £175,000, meaning your overall IHT allowance could potentially increase to £500,000. There is a tapered reduction of the RNRB where the net value of the assets held in a personal estate at the time of death is over £2 million.
If you’re thinking about making a gift, there are a few things you need to bear in mind. Firstly, you need to make sure that the gift is genuine and that you’re not just trying to avoid paying Inheritance Tax. Secondly, you need to consider whether the person you’re giving the gift to can afford to pay any Inheritance Tax that might be due on it (which would apply if the cumulative gift exceeds your nil-rate band). And finally, you need to think about what will happen to the asset after you die. Any income or gains made from the gift could have tax implications for the beneficiary, e.g., Capital Gains Tax.
You can make exempt gifts of up to £250. This is so long as each gift goes to a different person and each person has had no more than £250 from you in gifts in that tax year. Birthday and Christmas gifts and commonly included in this .
A wedding gift from a parent to their child of up to £5,000, from grandparent to grandchild or great-grandchild of up to £2,500, or up to £1,000 to another relative or friend, is also exempt.
In addition, each tax year you have what’s known as an ‘annual exemption’. Under this you can give away money or items of property to the value of £3,000. This can all go to one person or be shared between several people. And if you didn’t use that exemption in the previous tax year, you can use it in the current tax year and give away £6,000. It’s worth noting that certain gifts don’t count towards this annual exemption.
Known as ‘normal expenditure out of excess income’, you’re able to make regular payments from income you don’t need to maintain your normal standard of living. For example, if you wanted to pay a loved one’s rent or mortgage, or make regular payments into a savings account for your grandchild.
There isn’t a limit on how much you can give away and, like the exempt gifts above, the amount you gift will leave your estate straight away. But you must be able to afford the payments after your regular living costs and without having to cut back. Plus, the payments need to come from your normal monthly income and must be regular.
If you wanted, you could combine regular payments with your annual exemption in the same tax year. This could mean that one person can receive even more. It’s important to consider carefully how much you can afford. Although you may not need the money now, your circumstances in the future could change.
Keeping a record of the gifts you give is essential. It helps you show which are exempt and which may have to be included as part of your estate. And in the event of your death, it will also help those responsible for the administration of your estate when it comes to claiming any allowances and working out if there’s tax to pay.
If you wish to make larger gifts that fall outside the above exemptions, those gifts won’t fall out of your estate for Inheritance Tax purposes for seven years. Meaning they could fall back into the estate, which could make them subject to IHT depending on the gift amount.
We are living in an unprecedented age of personal wealth. Many of today’s baby boomer generation are far wealthier than any before. Which has been built on the back of generous pensions, secure high paid jobs and soaring property values. But for many of the next generation, future financial security and goals may be increasingly reliant on receiving a sizeable inheritance.
To discuss any of the issues raised in this article, please contact us. Further information on how to reduce Inheritance Tax can also be found at gov.uk.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. How to reduce inheritance tax by leaving a gift.
Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.
The Financial Conduct Authority (FCA) does not regulate tax advice, estate planning, trusts or will writing.
The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice.
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