You have worked hard throughout your life, building your wealth. As well as providing you with a comfortable retirement, the idea of your accrued wealth passing to your loved ones will also have been a big driving force.
However, unless you take steps and plan ahead, it is possible that a good chunk of your assets could actually go to HMRC on your death, rather than to your family.
In 2020/21, £5.32 billion was paid in Inheritance Tax (IHT). The expectation is that figure will increase in the coming years as property values continue to rise.
There are several estate planning steps you can take to reduce the amount of IHT that may be payable by your heirs when you pass away.
One of them, which is very relevant to the season of goodwill, is gifting.
Here are five good reasons why you should consider making gifts as part of your estate plan.
A quick word about how IHT works
Before we get on to the five reasons, it’s worth quickly outlining how IHT works, as this gives you a clear insight as to why gifting now can be so important.
In simple terms, your beneficiaries will pay IHT at a rate of 40% on the value of your estate above the applicable nil-rate band (NRB).
The current NRB is £325,000. On top of that, each person has a residence nil-rate band (RNRB), which is currently £175,000 if you leave your home to children or grandchildren.
Most people have a NRB of between £325,000 and £1 million, depending on your specific circumstances. You’ll normally pay IHT on the value of any estate you leave above this.
If you have a substantial estate, it can make sense to reduce its value as far as possible while you’re still alive, and so reduce the amount of IHT payable on your death.
Gifting is a popular and effective way of doing this.
1. Exemptions make gifting straightforward
There are various exemptions that you can make use of to reduce the value of your estate while you’re still alive.
For example, you can gift £3,000 each year and this amount will immediately fall outside the value of your estate.
You can also make exempt gifts for weddings or civil ceremonies. Additionally, you can give unlimited small gifts of up to £250 during each tax year, as long as the person has not benefited from any other exempted gifts during the year.
2. By gifting assets, you reduce the value of your estate
Beyond the gift exemptions outlined above, most other gifts you make – cash or other assets – will become potentially exempt transfers (PETs). If you survive for seven years after making a gift, it will typically fall outside your estate for IHT purposes.
If you die within the seven years, IHT may be payable on the value of the gift if it exceeds your NRB.
3. Gifting means you’re giving financial help when it’s most needed
By gifting now, you can ensure you pass your wealth to your loved ones when it can really help them.
This can often be far more beneficial to them than having to wait to inherit assets from you when you pass away. None of us know how long we’re going to live, so by gifting while you’re still alive you can make a real difference and be able to have the comfortable feeling of seeing your gift make a real difference.
For example, you could gift a lump sum to children or grandchildren to help them get on the housing ladder, or to help reduce their accrued university debt.
4. Gifts to charity reduce the rate at which IHT will be chargeable
By nominating a charity to receive some of your assets in your will you can reduce the IHT rate on your estate from 40% to 36%.
The key stipulation is that the gift to charity has to total at least 10% of the net value of your estate.
You could consider making a new year resolution to amend your will to support a charity or charities. This will benefit both the charity, and your heirs.
5. As well as lump sums, you can also make regular gifts out of income
You may well have relatives or loved ones who need ongoing financial support rather than one-off payments.
If you make gifts out of your regular income and they satisfy various conditions, then they are immediately exempt from IHT.
The three key conditions are:
- Gifts out of income should form a regular pattern of payments, rather than one-off events.
- You must be able to maintain a reasonable standard of living while you’re making such gifts.
- You must demonstrate that the gifts are from your actual income, rather than drawn from your accrued capital.
Given these criteria, we would always recommend that you keep accurate written records of this type of arrangement.
Gifts out of income are an effective way to pass some of the value of your estate to others while you’re still working and provide regular support to someone who needs it.
Get in touch
IHT and estate planning can be complicated subjects and we’d always recommend that you get advice from an expert. Mistakes can prove costly and could result in your heirs facing an unexpected, and often unnecessary tax bill after you die.
You can email us at firstname.lastname@example.org or contact your adviser on 020 3828 8100.