Pre Year End Tax Planning – Inheritance Tax Gifting
As well as considering your income tax position as part of your pre 5 April planning, this time can be used to look at your wider Inheritance Tax (IHT) position. You should start to consider ways of mitigating this in your lifetime, such as making gifts of assets or cash to your loved ones and dependents.
All individuals can make annual gifts of up to £3,000 each tax year without them being added to the value of your estate. You can give gifts or cash up to £3,000 to one person or split the £3,000 between several people. You can carry any unused annual exemption to the next year – but only for one tax year. Larger gifts can be made, but these will be classified as potentially exempt transfers and you need to survive 7 years before the value of these falls completely out of your estate.
If you are in a position where you earn more income every year than you spend to maintain your lifestyle, cash gifts out of income can be considered. This gift of any excess income needs to be made regularly (monthly or annually) and the full amount, regardless of the value will fall out with your estate. You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person. Birthday or Christmas gifts you give from your regular income are also exempt from IHT.
With IHT payable at 40% on amounts above the lifetime allowance of £325,000, there could be significant tax savings to be made by passing on assets now.
If the value of your estate is less than £2 million and you leave your home to your children or grandchildren, your estate may qualify for the residence nil rate band which could increase your tax-free threshold to £500,000.
You may also wish to consider increasing your bequests to charity. Your estate will pay a reduced rate of IHT of 36% if you leave 10% or more of the ‘net value’ to charity in your will.
These are only some points to consider to start reducing the value of your estate. For further details and to discuss your individual situation, get in touch with our Private Client Taxperts via [email protected] or call your local office.