That times are tough for young people is something most would agree with; as such, it’s unsurprising that many parents (and grandparents) are making larger gifts during their lifetime (rather than bequeathing assets as part of their children or grandchildren’s inheritance).
However, if you’re considering helping a member of your family or a friend, don’t forget that gifts within your lifetime can still incur IHT. With this in mind, it’s important to think about how to give tax-efficient gifts, and to make sure that you’re fully aware of all the rules.
Should I Be Concerned About IHT?
Recent figures show that only about 4.2 of estates were subject to IHT charges; however, the amount of tax that is being reclaimed due to IHT is rising every year (£5.2bn in 20172018). As such, it’s worth thinking really carefully about estate planning.
When considering how and when to pass on your legacy to loved ones, bear the following in mind:
- Up to £325,000 can be passed on without any IHT being charged (this sum is known as the ‘nil-rate band’.
- Anything over the ‘nil-rate band’ typically incurs the standard IHT rate of 40 tax.
- There are exceptions, however – if you leave your primary residence to someone in your will, or if you have a husband, wife or civil partner, for instance – meaning that it’s important to speak with a qualified tax adviser when thinking about any estate planning.
- In addition to the above, there are various exemptions that may allow you to give tax-efficient gifts during your lifetime.
Tax-Efficient Gifts: When is IHT Chargeable?
As discussed above, IHT is chargeable on the assets – like property or money – of a deceased individual. Inheritance tax tends to apply when the total value of an estate exceeds the nil-rate band threshold (and, if applicable, the residential nil-rate band threshold).
The good news is that there are ways to make tax-efficient gifts to loved ones that will allow recipients to avoid paying undue amounts. This is because each UK taxpayer has certain individual tax-free allowances. In brief, the sorts of gifts that can be made on a tax-free basis are as follows:
- Gifts to your spouse or civil partner.
- Gifts to a UK-registered charity.
- Wedding gifts, provided they meet certain conditions. Parents are permitted to gift up to £5,000 per child; grandparents are permitted to gift up to £2,500 per grandchild; and other relatives or friends can gift up to £1,000.
- Individual gifts, provided that these do not total more than £3,000 annually. If an allowance is not used in one particular year, it can be carried forward to the following year (meaning that up to £6,000 could be available).
- Provided that you have not used another exemption on the same person, you can give small, tax-efficient cash gifts of up to £250 (there is no limit on the number of people to whom this cash sum can be given, but you can only give one per person).
Gifts that are made seven – or more – years after a person’s death are not subject to income tax. However, gifts that are made that fall beyond the scope of your allowances and are made within seven years of death may be subject to IHT (depending on the individual circumstances and the total value of the estate).
Note, too, that the IHT rate depends on the time period between the gift being made and the benefactor’s death. IHT is charged at a rate of 40 for gifts that are made up to three years before the benefactor’s death; for gifts that are made between three and seven years prior to the benefactor’s death, taper relief applies (which reduces the IHT rate by 20 for each year that has passed).
IHT and Tax-Efficient Gifts: How to Plan
Whatever the size of your estate and however many gifts you are planning to give, we highly recommend seeking specialist advice. Though estate planning – and giving tax-efficient presents – does require a bit of advance thought, it could substantially increase the amount that you are able to bequeath your loved ones.
If you’re thinking about inheritance tax and estate planning, IBISS & Co’s team of chartered tax advisers and qualified experts are here to help. Don’t hesitate to contact us today to discuss your situation and future plans.