Inheritance tax giftsFebruary 21st, 2013 by Dan Woodruff, Certified Financial Planner with Woodruff Financial Planning
If you have worked out that you have an inheritance tax liability you may have considered inheritance tax gifts to reduce the amount of money your family will pay. This article examines the key issues surrounding inheritance tax gifts and why you might consider making them.
- Why consider inheritance tax gifts?
- Advantages of inheritance tax gifts
- Disadvantages of inheritance tax gifts
- Issues to consider
About inheritance tax
In the UK you pay inheritance tax on your death. If you have assets over £325,000 then inheritance tax is payable on the excess over this figure, at 40%. Married couples can pass assets between each other on death, and use the allowance from their deceased partner. Therefore, for married couples inheritance tax is payable on second death on assets over £650,000.
Why consider inheritance tax gifts?
If you have assets over the allowance inheritance tax gifts are a great way to reduce the value of your taxable estate. If you reduce the value of your estate you will pay less inheritance tax.
Financial planning and inheritance tax gifts
You might not be sure about making inheritance tax gifts since you could be worried that if you give away your assets you might need them in later life. One example of this might be that you could need nursing care. This is usually the main reason that people avoid making inheritance tax gifts – loss of control. What financial planning can do for you is to help you work out how much money you need to fund your future lifestyle. We can then examine the possible needs considering factors like nursing care. If you still have excess assets according to this analysis then you can start to consider making inheritance tax gifts. See our inheritance tax case study for more information.
Advantages of inheritance tax gifts
The main benefit to you of making inheritance tax gifts is that you get to see the use of the money before you die. Thus, you can put the money to good use in your family and actually get to see the results, rather than waiting until death and never getting the enjoyment of helping your family.
Inheritance tax gifts are also the most effective way of reducing your liability to tax, since if you no longer own the assets, your estate is reduced and you avoid paying the tax.
Disadvantages of inheritance tax gifts
The main problem with inheritance tax gifts is that once given away you cannot use the assets. If you still can access them then this is called a gift with reservation and it will not be effective for inheritance tax planning. This is the main reason that people avoid action. Of course, financial planning will help you to work out whether you can make inheritance tax gifts and still live the life you want in the future.
Issues to consider with inheritance tax gifts
You can make the following gifts without worrying about inheritance tax.
Each person can give away £3000 per tax year. If you did not make any inheritance tax gifts in the previous tax year you can double this to £6000 for one year only. Married people each get an allowance.
You can give away lump sums of up to £250 to as many people as you want.
Gifts out of income
You can give away the excess income if you do not need it, and can properly document this. Thus, if you have an income of £30,000 and expenses of £20,000, you can make inheritance tax gifts of £10,000. It is important that you do not use capital to fund your lifestyle and can survive on your income alone.
You can give away other amounts to charity, political parties or in consideration of marriage. There are also other rules surrounding business property, woodlands and agricultural land.
Potentially taxable inheritance tax gifts
If you have capital available which you do not need you can give away larger amounts. These could be potentially exempt transfers (PETs), or chargeable immediately. this depends on the type of inheritance tax gifts you make, and you should get advice on this issue.
Essentially, most inheritance tax gifts are potentially exempt transfers. Gifts you make are not taxable at the point you make them but are subject to a 7 year rule. If you survive for 7 years from the date of the gift then they usually drop out of your estate and are not taxable for inheritance tax. If you die within 7 years then the gifts could be drop back into your estate and become taxable. Gifts under your inheritance tax threshold of £325,000 will be fully taxable if you die within 7 years, and amounts over this figure could be reduced according to taper relief, and reduce over time on a sliding scale.
Get financial advice on making inheritance tax gifts
We specialise in financial planning surrounding inheritance tax gifts. We can help you work out whether this would be a valuable strategy for you, and consider other options for you such as insurance or trusts. We will also help you to establish how much is appropriate to give away without affecting your future lifestyle.
Photo credit: Flickr> FutUndBeidl