Inheritance Tax: Tax-Efficient Ways To Make A Gift

With the number of Britons who are now living past the age of 90, it is becoming increasingly harder for people to benefit from money passed down the family line. Waiting until someone has passed away could actually mean money going to waste when it comes to inheritance tax.

“By the time people are in their late 50s they have usually been through their hardest years. The mortgage is often paid off and children are typically through the education system. The 40s are for many parents the toughest decade financially – this is when they are shouldering the biggest mortgage or meeting the costs of school and university.” – Telegraph

So, the question perhaps should be, can you afford to give away money now, instead of waiting until it’s out of your hands?

When is the right time to give away money?

People often leave it until it’s too late to give money away to their loved ones, but you do not want to leave it until it’s too late if you have a choice and are financially stable to do so? A good time to think about this situation is after you have retired and when you have a clearer idea of what you have and how your retirement might pan out. With early lifetime planning and taking advantage of the various inheritance tax (IHT) exemptions and reliefs, an individual can reduce their exposure to IHT, increasing the amount that is available to pass on to their beneficiaries on death.

What are some of the tax-efficient ways to make a gift?

The seven-year rule

You can give away your home before you die – there’s normally no Inheritance Tax to pay if you move out of your property and you live for another 7 years. It will not form part of your estate and is tax-free. If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and this will fall into the 7-year rule.

The 7-year rule: if there is Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Potentially Exempt Transfer

Certain gifts are immediately exempt and the giver does not have to survive seven years from the date of the gift for this to apply.

– Annual exemption of £3,000. If the allowance is not used in a year, it can be carried forward to the next tax year.

– Small gifts exemption of £250 to any person – you can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

– Wedding or civil partnership gifts:

* £5,000 by a parent

* £2,500 by a grandparent or great grandparent

* £2,500 by a party to the marriage

* £1,000 by any other person

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

Family maintenance

Gifts that are given for family maintenance will not incur IHT. This could be gifts for education such as college or university or maintenance of a dependant relative.

Out of income gifts

Gifts that are made out of after-tax income are exempt from IHT. For this to be applicable, the gift must either form part of normal expenditure (a recurring pattern) or be out of income (not existing capital) and should not have an impact of your standard of living.

There is no cap on the amount of money that can be gifted under this exemption, as long as these conditions are met.

Gifts of business assets

Gifts from interest in a business or an unquoted share could be exempt from IHT due to business property relief (BPR).

Any ownership of a business, or share of a business, is included in the estate for Inheritance Tax purposes. However you can get Business Relief of either 50% or 100% on some of an estate’s business assets, which can be passed on:

– while the owner is still alive

– as part of the will

Much like BPR, agricultural businesses can benefit from a relief (APR) which can help reduce the value of agricultural property. Agricultural property that qualifies for Agricultural Relief is land or pasture that is used to grow crops or to rear animals intensively.

It is essential that records of gifts are kept to ensure that any IHT exemptions available are used and can be evidenced. This can be in the form of simple written notes, to be able to prove when gifts were made. When it comes to making gifts, it seems that doing it sooner rather than later can benefit everyone involved and can help you make a difference to those loved ones around you.

Always seek professional financial advice when it comes to inheritance tax, although gifts can be made and given, there are often other aspects that you need to consider.