As the saying goes, it’s better to give than to receive.
But did you know that when you give your loved ones a gift you can also benefit as well as the person you’re giving to?
It may come as a surprise, but when you make gifts as part of your overall inheritance tax planning, you can have the pleasure of giving, bring joy to your loved ones through your generosity, and even reduce your inheritance tax liability at the same time.
But to avoid potential pitfalls, you’ll want to understand the rules first. The following information is based on our current understanding of taxation law and practice in the UK which may change. The amount of tax you pay and relief you receive depends on your own personal circumstances which may also change in the future.
1. Know what’s defined as a gift
What counts as a gift for inheritance tax purposes? Simply put, it can be anything that’s part of your estate. Property, cars, cash, investments, jewellery – even collections of stamps, wine, coins or sports memorabilia can be liable to inheritance tax.
One thing to remember is normally you can’t add conditions to your gifts. For example, if the gift is a car, you can’t continue to drive it. If the gift is a home, you can’t continue to live in it rent-free otherwise inheritance tax may apply.
2. Begin giving early
As soon as you give a gift, an inheritance tax clock starts ticking. Usually, seven years must pass before your gift is 100% inheritance tax-free. If you die before this time lapses, the person you’ve given the gift to may owe inheritance tax.
It’s one reason for giving gifts early. When you’re younger you’re more likely to live seven years from the time the gift was given. Making gifts earlier also increases your chance of getting to experience the pleasure that comes from seeing those you love enjoy what you’ve given – and to thank you for it.
3. Use annual gift exemptions
Each of us has an annual allowance which permits gifts at or below £3,000, free of inheritance tax in any tax year. If this full amount isn’t taken one year, it carries over into the next year. This means that if you don’t give the full amount one year, you can give £6,000 the following year. This allowance can only be carried over for one year, however.
Everyone can also give as many gifts as they like below a value of £250. These gifts are currently inheritance tax exempt – there’s no seven-year clock ticking. It’s important to note that you cannot combine this small gift allowance and your annual allowance for any individual. This means that you couldn’t give someone a £3,000 gift and then another £250 small gift. Donations to charities, including gifts to political parties, can also reduce inheritance tax.
4. There are special rules for weddings
Weddings are gift-giving occasions. But before handing over a gift to the happy new couple, consider inheritance tax.
You may not be aware, but a wedding gift offers a chance to reduce inheritance tax. The amount that you can give inheritance tax free depends on your relationship to the couple and the timing and amount of your gift. Generally, the more closely you’re related to the couple, the more you can give.
So, if one of your children marries, you can give up to £5,000. If a grandchild or great-grandchild marries, this reduces to £2,500 or less. And if you’re giving to a relative or friend this drops to £1,000. But don’t wait until after the honeymoon to give your gift. It must be given before, not after the wedding to avoid attracting inheritance tax.
5. Document, document, document
It’s very important that you track the details of any gifts that you’ve made to reduce inheritance tax. You’ll need to record whom each gift was given to, the gift they were given, the date the gift was given, and the value of the gift.
It’s also helpful to keep evidence of the gift, for example, you can use a bank statement to evidence a gift of money. This will make it easier to establish if there is any inheritance tax due on your gifts when you die.
Reducing inheritance tax, one gift at a time
No one wants a gift given with love to create an unwanted tax issue for the recipient. Making sure that you’re giving gifts correctly can be complicated. Talking to Ethical Futures means that we will give you advice on the most up to date tax rules and allowances. This can help prevent future problems and ensure you and your loved ones are getting the most benefit.
Please get in touch so we can look at your potential inheritance tax liability. We will set up a plan that will aim to reduce or even eliminate your inheritance tax liability, which could include giving gifts as well as a number of other strategies to reduce your inheritance tax.