Graysons has seen a significant rise in enquiries from people wishing to make a will and from those wanting to know how they can use their wealth to help their families during the pandemic. Giving gifts during your lifetime is certainly an option to be considered. Here, Anne Rogers, partner and head of our private client team, discusses how this can be done and what the inheritance tax (IHT) implications are.
If your estate is likely to be valued at over your nil rate band (NRB) of £325,000, or £650,000 if you are married (which is the amount you can leave when you die without attracting inheritance tax), your beneficiaries will pay 40% tax on anything above that. If your estate includes your home and you are leaving it to your direct descendants, they can benefit from the residence nil rate band (RNRB) and inherit up to one million pounds IHT free.
However, you can help your friends and family now if you want to – as long as you follow strict rules – as there are certain gifts that you can give during your lifetime that will reduce your estate and, hence, the amount of inheritance tax payable.
When are gifts IHT free?
In general, if you make a gift to someone more than seven years before your death, the value of that gift will not be included in your estate, so no inheritance tax will be payable on it. Gifts given in this way are known as potentially exempt transfers, which means that if you die within seven years of making the gift, the value of that gift becomes part of your estate and IHT is payable if your estate exceeds your NRB. If your gifts mean that IHT does become payable, it reduces depending on how long you live after you give them. This is known as taper relief. The full tax of 40% is payable if the gifts were given in the three years before you die, reducing by 8% every year until no IHT is payable if the gifts were given seven years after you die. Find out more about taper relief, with an example, here. This is often referred to as the seven-year rule.
You can gift as much as you like to your spouse or civil partner during your lifetime and no IHT will be payable on that when you die, provided you both live in the UK (this does not include unmarried partners). However, capital gains tax may be payable if the gift is not cash but consists of property or shares in a business, for example. You should take professional advice relating to this and our private client experts are happy to help.
What tax-free gifts can I give?
Every year, during your lifetime, you have an annual gift allowance of £3,000, known as the annual exemption, which can be used to give gifts to anyone and will not be included in your estate – even if you die within seven years. This allowance can be carried over to the following year if it is not used, so you can give up to £6,000 in gifts in the second year. It can only be carried over once. The allowance is per individual, so you can give gifts of up £6,000 a year if you are a couple.
In addition to this, you can give other gifts that will not attract IHT if you die within seven years of giving them. These include:
- Wedding or civil partnership gifts of up to £5,000 for each child, up to £2,500 for each grandchild and up to £1,000 for anyone else. This is an annual allowance.
- Help with living costs for a spouse or ex-spouse, a civil partner or ex-civil partner, children under 18 or who are in full-time education or elderly, ill or disabled dependants.
- As many gifts of up to £250 per person as you would like to give, as long as that person has not benefited from one of the other exempted gifts.
- Gifts to some national institutions, such as universities or museums.
- Gifts to political parties that have had at least two members in the House of Commons following the last election before the donation is made, or one member and the party had received at least 150,000 votes.
- Gifts to qualifying charities or charitable organisations. Also, if you leave more than 10% of your net estate (the taxable amount after exemptions and the nil rate band is applied) to charities in your will, IHT liability is reduced from the standard 40% to 36%.
- Small, regular gifts to your children out of money on which you have already paid income tax, provided your normal lifestyle is not affected. This includes gifts made at Christmas, birthdays and anniversaries or payments such as insurance premiums or into a savings account. It can also be a way for grandparents to pay regular school fees.
What should you watch out for?
The seven-year rule does not apply if you give away an asset but continue to benefit from it. For example, if you give your home to your children, but continue to live in it, rent-free, the house will be considered part of your estate and IHT will be payable if you exceed your NRB or RNRB.
It is vital that you keep details of gifts you have given during your lifetime so that your personal representative can deal with them accurately when you die, can properly value your estate and your IHT liability is properly assessed.
“The coronavirus pandemic certainly seems to have focussed people’s minds on getting their financial affairs in order, including how they can help their families now and reduce their inheritance tax at the same time. I have found that many are not fully aware of the ability to use gift-giving as a tool to reduce IHT. Of course, there are strict rules, but it is certainly possible to help your family financially now. I would advise that if you are looking at ways of reducing IHT and want to give money to your family, you don’t delay. The seven-year rule currently in place is strict, but it works well. There is every likelihood that changes to IHT rules are on the cards and the seven-year rule might be at risk.”
If you want advice on making a will or estate planning, including how to use your wealth now to assist your family during the coronavirus pandemic, contact our private client experts now. You can also find out more about making your will, or inheritance tax planning on our website.
Author: Anne Rogers, partner and head of the private client team.