Gifting can be a strategic way to reduce your potential IHT liability and transfer wealth to future generations.
How Gifting Can Help with Inheritance Tax Planning Year-Round
While the festive season is a popular time for gifting, inheritance tax (IHT) planning can be effective at any time of the year. Whether it's for a birthday, celebrating exam success, or simply good financial planning, gifting can be a strategic way to reduce your potential IHT liability and transfer wealth to future generations.
Inheritance Tax (IHT) Basics
IHT is a tax levied on the value of your estate when you die, with a standard rate of 40%. However, there are exemptions and allowances that can significantly reduce your IHT bill.
Gifting and IHT Planning
- Annual Exemption: You can gift up to £3,000 per year tax-free.
- Unused Annual Exemptions: If you don't use your full annual exemption in one year, you can carry it forward to the next year. This means you could potentially gift up to £6,000 in a single year.
- Small Gifts Exemption: You can make smaller gifts of up to £250 per person per tax year, tax-free. This is a great way to give smaller gifts to a larger number of people. There are additional allowances for when someone gets married.
- Regular Gifts from Income: You can make regular gifts out of your income, provided they don't affect your standard of living. These gifts must be regular and made from income rather than capital.
Any gifts you make that are not covered by these exemptions will be subject to IHT if you die within seven years of making them.
Intergenerational Wealth Planning
Gifting can also be part of your intergenerational wealth planning strategy. By gifting assets or money to your children or grandchildren, you can help them get a head start in life, whether it's for a house deposit, education, or starting a business.
Important Considerations
While gifting can be a tax-efficient way to reduce your IHT liability and help your loved ones, it's essential to keep a few things in mind:
- Seven-Year Rule: If you make a gift that exceeds the annual exemption, it will be subject to IHT if you die within seven years of making the gift.
- Gift with Reservation of Benefit: If you continue to benefit from a gift you've made, it may still be considered part of your estate for IHT purposes.
- Seek Professional Advice: It's always a good idea to seek advice from a tax expert or financial adviser to ensure that your gifting strategy is tax-efficient and meets your needs.
By understanding the rules and seeking professional advice, you can use gifting as a powerful tool to reduce your IHT liability and help your loved ones financially—not just at Christmas but at any time of the year.
If you would like to discuss your individual circumstances, please do get in touch.
By Daren Wallbank
Tax treatment varies according to individual circumstances and is subject to change. Inheritance Tax Planning is not regulated by the Financial Conduct Authority.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited 10/12/2024.
