It is the season for exchanging gifts with your loved ones and we spend so much time trying to find the perfect and most thoughtful gift for every person. Perhaps however the most thoughtful gift is to plan to mitigate your inheritance tax liability through the use of gifts and therefore maximise the value you pass on to those people.
Broadly speaking, inheritance tax is paid on the value of assets in your sole name and of your share of joint assets, along with the value of gifts made in the seven years before you pass away. The value of any debts or share of debts is however deducted and inheritance tax is paid on the value of everything above your nil rate band, which is currently £325,000. As you can see therefore, making gifts that you expect to survive by seven years is one simple way to reduce the value of your estate for inheritance tax purposes.
There are however exemptions available on gifts. Small gifts of up to a total of £250 per person per tax year are exempt, but as soon as gifts to any individual exceed this, the whole value of the gift may be subject to inheritance tax i.e. gifts totalling £300 in one tax year do not attract £250 worth of relief.
There is however an annual exemption of £3,000 for gifts that do not fall into the above category. Any unused allowance can be rolled forward up to one year, to give you a maximum of £6,000 in any one tax year.
There are further exemptions on gifts made in contemplation of marriage and gifts on such occasions attract an additional relief of £5,000 per person on gifts to a child, £2,500 per person on gifts to a grandchild or great grandchild or £1,000 to any other person.
Gifts out of surplus income are also exempt from inheritance tax, irrespective of their value. This is a hugely valuable relief when used properly, but HMRC will scrutinise your finances closely to ensure that the income truly was surplus and your standard of living must not suffer as a result of the gifts. We would recommend keeping detailed records, such as copies of tax returns, should you intend to utilise this allowance.
Lastly, where significant gifts are made in the seven years prior to someone passing away and the total gifts exceeds the nil rate band mentioned, any gifts that bring the cumulative total beyond the nil rate band (starting with the oldest first) can attract taper relief, which is effectively a reduction in the tax payable on that gift. If the gift was made between three and four years of someone passing away, there is a 20% reduction in the tax payable and the reduction increases by a further 20% for each year beyond that, up to a maximum 80% reduction in inheritance tax for gifts between six and seven years before someone’s passing.
As a recipient of any gift, you can usually take gifts free of income tax. If the person that made the gift to you passes away within seven years of that gift however and inheritance tax is payable on that gift, you would be responsible for the inheritance tax attributable to that gift. Practically speaking, if you are also a beneficiary of the estate, it may be possible for the executors to take the inheritance tax payable out of your share of the estate. This may not always be possible and you should therefore be prepared for this circumstance.
In summary, effective use of the many reliefs available can save significant amounts of inheritance tax, but we would recommend seeking professional advice as there are many other factors to consider and at Stephensons we look at your situation as a whole. Clients who spend hundreds on professional advice can and often do save tens or even hundreds of thousands of pounds in tax. That’s far better value than any January sale could ever offer!
If you would like to find out whether we can assist, please call us on 01616 966 229.