Making a gift to your family and friends while you’re alive can be a very effective way to reduce the value of your estate for Inheritance Tax (IHT) purposes and benefit your loved ones immediately.

Fiducia Wealth Management
Posted in Financial Advice, Inheritance Tax on 15.04.17
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Married couples and registered civil partners are allowed to pass their estate to their spouse tax-free when they die. In other words, the surviving spouse can inherit the entire estate without having to pay IHT.

You can also pass on your unused tax-free allowance to your spouse. However, gifts to your partner who isn’t married to you might incur IHT.

When to make that gift
What and how much you wish to give your children or other members of your family is completely up to you. But to ensure that it’s IHT-free, it’s important to plan when to make that gift. So long as you live more than seven years from when you make this gift, your children or family will not have to pay IHT on your gift when you die.

But if you unfortunately don’t live more than seven years after you’ve made the gift, they might have to pay IHT. During that seven-year period, your gift is known as a ‘potentially exempt transfer’ (or ‘PET’). If you do not survive the gift by seven years, the exemption fails. The PET is counted as part of your estate and is subject to IHT. How much tax is due depends on when it was given – the rate of tax is lower for older gifts.

Gifts where you still have an interest in it (no matter when you’ve given it) don’t qualify as a PET – for example, if you continue to live for free in the house you gave your child more than ten years ago. The house would still be considered part of your estate and therefore subject to Inheritance Tax. This is known as ‘reserving a benefit’ in the property which you gave away.

Other taxable gifts
The PET is reassessed and added to any other taxable gift you may have made in the seven years before making the PET. This has to happen to see whether any tax is now due on the PET itself. This means that gifts made during the 14 years before death could be relevant.

If tax does become due on a PET, the person who received the PET will be asked to pay the tax. However, the tax due may be reduced because of ‘taper relief’.
The impact of taper relief in reducing tax due on PETs:

• If the gift was made less than three years before death, no reduction in tax is due
• If the gift was made three to four years before death, tax is reduced by 20%
• If the gift was made four to five years before death, tax is reduced by 40%
• If the gift was made five to six years before death, tax is reduced by 60%
• If the gift was made six to seven years before death, tax is reduced by 80%

Total of taxable gifts
If the seven-year running total of taxable gifts and PETs made comes to less than the tax-free allowance (at the date of death), no tax will be due on the PET. While taper relief may reduce tax on PETs if you die within seven years of making them, it won’t reduce the tax due on your estate.

The second thing to happen if you die within seven years of making a PET is that the PET is also added to your estate to work out how much tax is due on the estate. If the seven-year running total of PETs, chargeable gifts and your estate comes to less than the unused tax-free allowance, no tax will be due.

However, if much of the tax-free allowance has been used up against PETs and taxable lifetime gifts, this can leave little or no allowance to be used against the rest of the estate.

You should also bear in mind that your gift could incur other types of tax, such as Income Tax or Capital Gains Tax. A gift of shares, for example, might incur Income Tax.

Giving to charity
There is no limit to how much and how often you can give to a charity without incurring IHT. You could also get some relief on other types of tax such as Income Tax when you do this. If you leave at least 10% or more of the ‘net value’ of your estate, it’s possible to reduce the rate of Inheritance Tax on some assets from 40% to 36%. This could save thousands of pounds.

Annual ‘gift allowance’
While you’re alive, you have a year without incurring IHT. Certain gifts don’t count towards this annual exemption. As such, no IHT is due on them. Gifts that are worth more than the £3,000 allowance are subject to IHT. The amount of tax to pay on these gifts depends on whether it was given within seven years before the person died.

You can carry over any leftover allowance from one tax year to the next, up to a maximum of £6,000. If you do this, you have to use up all your allowance in that tax year. In other words, you can’t accumulate several years’ worth of allowance and use it up in a single large gift.

Gifting tax-free
You can give as many gifts of up to £250 to as many people as you want (though not to anyone who has already received a gift of your whole £3,000 annual exemption). None of these gifts are subject to IHT.

Gifts can also be made to people getting married: up to £5,000 from each parent of the couple and £2,500 from each grandparent or more remote relative; £2,500 from the bridegroom to bride (and vice versa) and between registered civil partners; and £1,000 from anyone else.

If you have enough income to maintain your usual standard of living, you can also make gifts from your surplus income, for example, regularly paying into your child’s savings account, or paying a life insurance premium for your spouse or registered civil partner. To make use of this exemption, it’s very important that you keep very good records of these gifts. Otherwise, IHT is very likely to be due on these gifts when you die.

The rules for this exemption are complex – these gifts must be regular, so you need to be committed to keeping up with making these gifts. It’s best to speak to a legal or estate tax adviser first if you want to use this exemption.

This is a good way of giving gifts on birthdays, Christmas or even to pay life insurance premiums. Grandparents can also use it to pay for things like their grandchildren’s school fees.

Keeping records

Keeping a record of gifts will help your executor and HM Revenue & Customs calculate how much of your estate (if any) is liable for IHT. Information to include:

• What you gave
• How much the gift is worth
• The recipient
• The date you gave it

Financial security
Although it is tempting to transfer assets out of your estate in order to minimise IHT, you shouldn’t take risks with your financial stability. Ensuring that you are financially secure, particularly in retirement, should be a priority.

Once you have made the gift, you no longer have control over the asset in question, so think carefully about the implications before making a decision.

For more information on how we can help with reducing the amount of IHT your estate will pay visit the IHT & Estate planning section of our site.

Fiducia Wealth Management
Posted in Financial Advice, Inheritance Tax on 15.04.17

If you would like to know more about how we as Financial Advisers can help you with Inheritance Tax visit the Estate Planning section of our website: Estate Planning or send us email at: [email protected]

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