Question: My wife and I are in our mid 60’s and we have recently retired. We are considering giving our adult children gifts of assets as we are concerned about our inheritance tax liabilities should we die. What are our options for making gifts and what are the tax implications?
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. Lifetime planning is a vital tool in the tax planning of an estate. Since the current nil rate band has not increased since April 2009 and house prices are slowly increasing, more and more estates are coming within this tax.
There is normally no Inheritance Tax to pay if the value of your estate is below the £325,000 threshold or if you leave everything to your spouse or civil partner, a charity or a community amateur sports club. If you’re married or in a civil partnership and your estate is worth less than £325,000, you can transfer any unused threshold to your partner when you die. This means their threshold can be as much as £650,000.
Some of the most effective planning tools for inheritance tax purposes are small, simple changes that can enhance the overall tax efficiency of your estate. There are various exemptions provided for gifts which, when used to their full potential consistently over many years, can add up to a significant estate reduction.
Firstly, there is usually no Inheritance Tax to pay on small gifts you make out of your normal income, eg Christmas or birthday presents. These are known as ‘exempted gifts’. You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.
Secondly, you can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year – but only for one year. You can also give away wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great grandchild, £5,000 for a child).
Thirdly, a further type of exemption gift covers those that are made out of income, as opposed to capital. These are exempt at the time they are made and there is no seven year rule to apply. This exemption only applies to gifts made from your surplus income.
It is also worth noting that a gift of any type to a registered charity is exempt from Inheritance Tax.
Finally, there is also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime – as long as they live in the UK permanently.
Other gifts count towards the value of your estate. There may be Inheritance Tax to pay if you’ve given away more than £325,000, but only if you die within 7 years. Inheritance Tax on gifts is paid by the person who received the gift (the ‘beneficiary’) – not the estate. If there’s 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’.
Inheritance Tax planning has no fixed form and can be highly emotive but a mixed approach of exempt giving and well planned lifetime giving can significantly mitigate the tax you pay on your estate.
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