Are you aware that when you use gifts as part of your final inheritance tax planning, not only will you receive the joy of giving your loved ones a gift, but you can even reduce your inheritance tax liability.
- Understand the definitions of a gift
A gift could be property, money, cars, investments or jewellery – almost anything can be classed as a gift for inheritance tax purposes.
It is important to remember that you are usually not able to add conditions to your gifts. For example, if the gift you give is a property, you wouldn’t be able to live in the property rent-free otherwise inheritance tax could apply. Similarly, if the gift is a car, you wouldn’t ne able to continue to drive it.
- Begin giving gifts early
Once you give someone a gift, the inheritance tax clock begins. In most circumstances, you usually have to wait 7 years before your gift is completely free of inheritance tax.
If you died within those 7 years the person you have given a gift to may owe inheritance tax.
Giving someone a gift earlier increases your chance of being able to see the pleasure of them enjoying the gift – and to thank you for it.
- Use annual gift exemptions
We all have an annual allowance, which permits gifts of £3000 or below to be free of inheritance tax in any tax year. If the full amount is not used within one year, it moves over into the next year. Therefore, if you don’t give the full amount during one year, it would then double to £6,000 the next year. However, this allowance can only be carried over for one year, it is not something you can continuously mount up over years.
Everyone is entitled to give as many gifts under the value of £250 as they like. The good thing about these gifts is they are exempt from inheritance tax meaning there is no 7 year clock ticking.
But, it is also important to remember that you can’t combine this small gift allowance and your annual allowance for any individual. For example, you wouldn’t be able to give someone a £3,000 gift and then a £250 smaller gift.
So think carefully about who you are going to give which gift to. Charity donations, including gifts to political parties, can also reduce inheritance tax.
- Consider the rules when giving wedding gifts
It is widely known that weddings are gift-giving occasions. However, before giving a gift to the happy new couple, it’s important to consider inheritance tax.
A lot of people are unaware of this, but wedding gifts offer the chance to reduce inheritance tax. However, this all depends on your relationship to the couple, the timing, and the amount of your gift.
Normally, the closer you’re related to the couple, the more you can give. For example, if one of your children gets married, you can give up to £5,000. If a grandchild or great-grandchild marries, this will then reduce to £2,500 or less. If you’re giving to a relative or friend this reduces to £1,000.
It is important to be aware that you must not wait until after the honeymoon to give the couple your gift. It must be given before and not after the wedding to avoid adding inheritance tax.
- Document your gifts
When giving out gifts it is imperative that you keep track of the details in which you’ve made to reduce inheritance tax.
You’ll need to record whom each gift was given to, the gift they were given, the date and value of the gift.
It would also be beneficial to keep hold of any evidence of the gift, for example, you can use a bank statement as evidence of a gift of money. This will make it easier to establish if there is any inheritance tax due regarding your gifts when you die.
We can come to you, in the privacy and convenience of your own home, to discuss Wills, Trusts and Lasting Powers of Attorney.
We can explain why they are important and suggest ways that you can put steps in place to give you peace of mind for the future.
By drafting a Will, Lasting Powers of Attorney or setting up Trusts, not only will your wishes be carried out as you would like but you can also protect your family and friends from costly and stressful legal disputes. Please contact us on 01724 642 842 or by email on info@tytolaw.co.uk.