Pictured: Helen Draper MMath(Hons) FCA
Tax-efficient gift-giving is an essential aspect of estate planning that can significantly reduce your inheritance tax (IHT) liabilities while benefiting your loved ones. Outright gifts also have the attraction of being relatively quick and easy to execute, which could well be appealing in view of the forthcoming Autumn Budget and speculation surrounding what changes to IHT, if any, might be announced.
IHT is currently charged at 40% on estates above the Nil-Rate Band (NRB), which has remained at £325,000 for many years (there is also a ‘Residence Nil Rate Band’ of £175,000 per person, subject to certain restrictions).
I have highlighted below some helpful tips, but these are by no means an exhaustive list and, as always, each individual’s circumstances will be different and specific advice tailored to your needs is essential.
Exemptions for Lifetime Gifts
Most straightforward gifts of any value can be made completely free of IHT provided the donor lives for 7 years after making the gift and does not reserve any benefit whatsoever in respect of the gifted property (e.g. one cannot just give a property away and continue to enjoy living in it rent free). Such gifts should however only be made after consultation with your professional advisers in order to ensure that all relevant factors (including possible Capital Gains Tax consequences) are taken into account.
In addition, the following gifts may be made each tax year without using up any part of an individual’s NRB:
• Small gifts of up to £250 to each of as many individuals as the donor wishes to benefit;
• Annual gift allowance of up to £3,000. This exemption is applied to larger gifts not covered by the £250 exemption above. It can also be carried forward for one tax year only if it is not used in the year in question;
• Gifts that are a wedding or civil partnership gift worth up to £5,000 to a child, £2,500 to a grandchild or great grandchild and £1,000 to anyone else;
• Gifts to registered charities, museums, universities, political parties, housing associations, national heritage bodies or community amateur sports clubs.
Gifts From Surplus Net Income
Perhaps one of the most overlooked IHT exemptions is one entitled “normal expenditure out of income”. For gifts to qualify for this exemption (which means that even if the donor dies within seven years, they are still not subject to IHT) there are three main criteria which have to be met:
• The gifts must have been made as part of the normal expenditure of the donor and generally speaking there has to be some regularity to the gifts being made;
• Taking one year with another, the gifts must be made out of income (not capital); and
• After allowing for all gifts etc. forming part of the normal expenditure, the donor must be left with sufficient income net of income tax to maintain his or her normal standard of living.
You must also maintain careful records of your gifts and income/expenditure in order for your Executors to be in a position to prove that you were able to maintain the same standard of living after making the gifts.
The above is for general guidance only and no action should be taken without obtaining specific advice.
If you are looking to slice your tax, it pays to get professional advice.
Pearson May specialise in a full range of accountancy services to help you maximise your profits and minimise the tax you have to pay.
Call Bath: 01225460491
Pearson May Chartered Accountants & Chartered Tax Advisers
Bath, Trowbridge and Chippenham
pearsonmay.co.uk
