One of our Partners, Kerry Hilliard, explains below how you can use gifts to plan for inheritance tax.
One of the most straightforward ways of ensuring that tax is not charged unnecessarily is to consider making a gift of your assets while you are alive. Married couples and civil partners can inherit their spouse's estate tax free, but if you make a gift to another family member or third party you are potentially transferring part of your estate and a life-time charge to inheritance tax may apply.
Some gifts can be exempt if they are made during a person's lifetime - everyone has the following tax-free allowances for making gifts:
Annual exemption – you can give away £3,000 per year of assets or cash, divided between one or more people. Even better, you can carry forward any unused allowance to the following tax year, so you could potentially have a maximum of £6,000 available in a year.
Wedding or civil ceremony gifts – you can gift up to £1,000 to anyone for a wedding and parents and grandparents can make a one off gift of up to £5,000 and £2,500 respectively on the marriage of a child or grandchild.
Gifts out of income – you can give away regular amounts that you don't need from your post-tax income. There must be a regular pattern of gifting and you must be able to maintain your standard of living after making the gift.
Maintenance of a dependant – this may include payments for the maintenance of an ex-spouse, an elderly dependant or a child under 18 or in full-time education
Gifts to charities or a qualifying political party – are fully exempt
Small gift exemption - gifts of up to £250 per person during the tax year as long as you have not used another exemption on the same person.
A gift that is not covered by the above or not exempt in any other way may still be deferred as a potentially exempt transfers or PET. Provided that you remain alive for the next 7 years from the date of making the gift, the transfer will be free of inheritance tax. A tapered rate of tax applies if the donor dies during this seven year period.
To help your executors to administer your estate, it is important to keep a record of gifts made and more importantly the exemptions that have been claimed.
For more information and advice contact our reception on 01733 343275.