Inheritance Tax and gifting
In a recent Financial Times article Michael Martin wrote about enjoying your cash while you can and inheritance tax planning. Inheritance tax is certainly an emotive subject – people are understandably upset that their estates could pay 40% tax on money earned during their lifetime on which they already pay National Insurance and income tax and further taxes on invested income.
When it comes to giving advice on inheritance tax there is not a simple catch all answer because everybody’s circumstances are different and what suits one person may not suit another. However, the first solution is simple: look after yourself first and after you have looked after yourself, worry about the next generation. Before thinking further about inheritance tax consider whether you have enough money to live comfortably for the rest of your life, including the costs of long-term care should it become necessary.
If you have worked out that you have sufficient capital, you can then think about the next generation and perhaps consider gifting.
Six simple ways you can avoid UK Inheritance Tax in 2019 by gifting
- Annual exemption. Every person is allowed to make an inheritance tax free gift of up to £3,000 in any tax year. This allowance can be carried forward one year if you do not use up all of your allowance. This means that a couple could gift say children or grandchildren £6,000 this year (or £12,000 if your previous year’s allowances were not used up) and that gift will not incur inheritance tax. You can make this gift annually.
- Small gift exemption. You are able to make small gifts of up to £250 per year to any number of recipients in one tax year and (provided you have made no other gifts to that person during the tax year) these gifts will be inheritance tax free.
- Marriage or civil partnership gift exemption. On the occasion of someone you know getting married or entering into a civil partnership you can give cash inheritance tax free up to £5,000 to a child, £2,500 to a grandchild or great grandchild and up to £1,000 to anyone else.
- Inheritance tax free bequests. Gifts or bequests to charities, political parties, universities and for national purpose or public benefit are inheritance tax exempt.
- Business owner exemptions. If you are a business owner, you may be eligible for tax reliefs depending on the type of business you own, resulting in transfers made during your lifetime or on death being inheritance tax free. The main tax reliefs are Business Property Relief and Agricultural Property Relief (subject to various conditions).
- Normal expenditure out of income. The normal expenditure out of income exemption is greatly underused but can be a valuable way to gift excess income to beneficiaries free of inheritance tax. This can be particularly useful for those who still work or have excess income they do not need but want to save for beneficiaries. It can also be used to place excess income into a trust to accumulate over time e.g. for minors to use in the future, perhaps for university costs or as a house deposit. In order to meet HM Revenue & Customs’ definition of being from excess income, the rules are as follows:
- Payments must be from income (e.g. earnings, dividends, interest, rental income or pension income);
- Payments must be from normal expenditure;
- Keep a consistent pattern. Payments do not need to be the same amount or on the same date or over a set period, but HMRC will look for a pattern over a period of time;
- Maintain your standard of living – there must be no negative impact on your standard of living after making the payment.
It is advisable to keep clear records if you are likely to utilise this exemption. At Dixon Alderton Law we can provide a spreadsheet for you to complete on a year to year basis and statements to support a future claim.
These are just some of the easiest and most common ways by which you can use planning to cut your inheritance tax bill. Depending on your personal circumstances, you may be able to also use a trust or trusts, and in addition to the above, you can gift as much as you want to whomever you wish and as long as you survive for 7 years, it will fall out of your estate.
For a no obligation discussion tailored to your own personal circumstances, please get in touch – but more than anything, enjoy your wealth while you can!