If you feel guilty about SKIing, (spending your kids' inheritance) 'Gifting' could be the solution!
Swinburne Maddison’s Amy Pyman, associate solicitor in the private client team, offers six tips for successful gifting.
Gifting through your lifetime can be a great tool to manage your Inheritance Tax (IHT) liability but it does come with complexities.
1. What are the IHT rules?
Each individual has an IHT-free threshold of £325,000.00 (known as the Nil Rate Band). Assets over this amount (that cannot benefit from any other kinds of relief) will be taxed at 40%.
If you are married and/or have children who will inherit your main home, you may benefit from some additional allowances of up to £1million – if your estate is valued at over £2million, you start to lose some of these reliefs.
2. The seven year rule
Not everyone fully understands ‘the seven-year rule’. In short, if
You live for seven years after making a gift, and have never made any other gifts, IHT will not be payable on that sum.
You make any gifts in the seven years prior to your death, the NRB will be reduced by the value of the gifts. These gifts are known as “Potentially Exempt Transfers”.
You make gifts over the NRB in the seven years before your death, IHT on that gift may need to be paid on your death.
You make a gift but continue to benefit from it – if you gift your home to your children yet continue to live there for example – it will still be taxable on your death.
3. Why should you think about gifting?
If you have assets over the IHT free amounts, the most effective way to manage your IHT liability is to reduce the value of your estate.
There is no limit to how much you can gift as long as you know the tax implications. Some really easy ways to gift, without the headache of the seven-year rule are:-
You can make gifts of up to £3,000 per year, IHT free.
You can make small gifts of £250 per year to as many individuals as you like.
Gifts to charities pass completely IHT free.
Gifts out of excess income can stop your Estate from growing any further.
4. What if I don’t live for seven years?
There can still be a significant saving to your estate. If you live for three years after gifting, the IHT on that gift will be reduced. The reduction becoming greater as more time passes.
5. What if my beneficiary gets divorced?
If you don’t wish to gift money outright to beneficiaries in case they get divorced, become bankrupt or encounter any other unforeseeable event, you could consider transferring assets into Trust and becoming a Trustee so you can control when the money is paid to your beneficiaries.
6. Do your Executors have all your information?
Even if no IHT is payable as a result of careful gifting, it is important that your Executors have all the information they need to allow them to correctly report to HMRC. The most important thing is that you keep a record of your gifting and ideally, also keep a record of your usual income and outgoings so that they can make the most of any additional reliefs.
Other things to consider:
Capital Gains Tax might be relevant.
There are other ways to manage IHT – ensure you have considered all options.
Ensure you have a valid Will, which is kept up to date or Executors could face an avoidable IHT headache!
Beyond anything else, the most IHT effective thing you can do is to enjoy your money – go SKIing and take the kids too – if you must!
For advice, please contact Amy Pyman by email at ajp@swinburnemaddison.co.uk or call 0191 338 6515.
www.swinburnemaddison.co.uk