A Time for Gifts
A friend asked me recently how much the tax man would take out of the value of her home and savings when she dies and whether anything at all would be left for her loved ones.
Her main worry is Inheritance Tax (IHT) which kicks in from a threshold of £325,000 and affects all your property, cash and investments.
Luckily, as long as you plan ahead and make use of them during the lifetime, there are some valuable IHT reliefs that can be used to reduce tax liability.
Firstly, you have an annual IHT-free allowance of £3,000 a year. Gifts above this amount are subject to the ‘seven year rule’ and should you die within that time, will be included in your estate for IHT purposes. Your annual allowance can be carried forward for one year, but no longer than that. So if you have made no gifts this tax year or last tax year and you wish to, you can therefore give away up to £6,000 without any IHT consequences.
In addition, you can give away up to £250 to as many people as you like with no IHT consequences.
You should also be aware that if a child or grandchild is getting married this year, parents can give them £5,000 and grandparents £2,500, with no IHT consequences.
For all outright gifts like these, there are no legal formalities but you should keep good records as it is your Executors who will need to come up with the evidence.
Another useful and under used IHT exemption is ‘regular gifts out of income’. The rules for this are quite complicated and you should take professional advice on the paperwork requirements so that your Executors can make a successful claim in due course. However in brief, you can make payments as part of a settled pattern of expenditure from your excess income. The payments must not come from your capital and must not affect your standard of living. If, for example, you have generous pensions which you are not spending by the end of the year, you could consider making regular gifts out of these funds.
Another break, introduced in the Autumn Statement, allows a spouse or civil partner to add their partner’s ISA savings allowance onto theirs, on top of their usual allowance for that year.
If you are a widow or widower, make sure you keep the paperwork concerning your late partner’s estate in a safe place. Your estate may be entitled to their ‘transferable £325,000 nil rate band’ in addition to your own nil rate band, which could remove or certainly reduce any IHT liability on your death.
The key with IHT is to obtain advice from your solicitor as to what would apply for you and your circumstances.