A favourite expression of mine when discussing estate planning with clients is ‘giving with warm hands’. What this means in simple terms is making gifts whilst you are still alive, rather than waiting and passing on any inheritance after your death. Not only can this be a great way to help children or grandchildren financially at a time when they may most need help, but it can also reduce the taxable value of your estate.
Clearly the first priority is your own future financial security and ensuring that you have enough money to live on, but with over £5.4bn paid in inheritance tax (IHT) last year, planning now could ultimately save your loved one’s thousands.
The first step with any estate planning is to ensure that you have valid, up to date Wills and power of attorneys in place. I would also suggest that you keep a list of your assets recorded somewhere. You can then start to consider how and when you would want your loved ones to benefit and you may find it useful to involve your family at an early stage.
In most cases, any gifts will be available to the recipients to enjoy immediately. Depending on your wishes however, rather than make a gift outright, you may decide to delay when the funds become available by making a gift into trust.
In general, money given away before you die is usually still counted as part of your estate and will be subject to inheritance tax if you die within seven years of making the gift. There are however certain types of gifts which are treated as being immediately outside of your estate for inheritance purposes.
These include, the first £3,000 given away each tax year. In addition, if you don't use this annual exemption one year, you can carry it forward for one tax year – meaning that up to £12,000 per couple can be gifted in this way.
Another less well-known way of making gifts in a tax efficient manner is to make regular gifts out of income. These gifts must be from your post-tax income and leave you with sufficient income to maintain your standard of living.
Parents and grandparents can make one-off gifts on the marriage of children or grandchildren (up to £5,000 and £2,500 respectively), whilst marriage gifts to anyone else are subject to a limit of £1,000.
It is also possible to make small gifts, of no more than £250 to any one recipient per tax year. These are again completely free of IHT, provided they haven’t received a gift which uses another exemption.
Finally, gifts to charities or political parties are also exempt from inheritance tax.
Clearly there’s a lot to think about with estate planning and whilst for many people reducing their IHT bill is likely to be important, don’t forget that the starting point should always be ensuring your financial security in old age.
If you feel that you could benefit from advice in this complicated area, please do not hesitate to contact us for an initial no obligation consultation at our cost.
Please note that levels of taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Inheritance Tax Planning.