To gift or not to gift…
Are you wondering how you can reduce the amount of inheritance tax (IHT) that will have to be paid on your estate when you die? Perhaps because you want to maximise the amount of your hard-earned wealth that will go to your family, or simply because of an aversion to the tax man!
Some people achieve this with a well structured Will while others embark on a comprehensive strategy of lifetime planning.
Lifetime planning involves reducing the value of your estate as far as possible during your lifetime in order, ultimately, to reduce the IHT liability. At its simplest, it may mean spending your well earned money on luxury holidays or cars but for many people it also means making sure the next generation is well provided for, perhaps by helping children on to the property ladder or helping to fund the grandchildren’s education.
There are, however, three main restrictions which hinder lifetime gifting:
1. You need to leave yourself with sufficient for your own needs. Often the bulk of wealth is tied up in the house and you do not want to leave yourself vulnerable in your retirement, without a house or savings to fall back on.
2. Outright gifts only become exempt from IHT if you survive seven years from the date of the gift.
3. Any gift must be genuine. If you continue to use or benefit from the asset given away, HMRC will ignore the gift and include the asset as part of your estate when calculating any IHT due. For example, it is common for people to consider gifting some or all of their home to their children, believing that this will reduce the value of their estate for IHT purposes. If, however, they continue to live in (and therefore derive a benefit from) the property, HMRC will ignore the gift and generous donors may find that they end up living in a property they no longer own but which is still in their estate for IHT purposes.
If lifetime gifting is something you are considering, think carefully and take advice before doing so. There may be more tax efficient ways of achieving the same objective (for example by using your annual gift exemption, which permits a certain amount of tax free giving each year, or making gifts out of excess income) or alternatively you could set up a trust of which you are a trustee in order to retain an element of control over the assets.
To find out more about lifetime gifting or to request our guidance note about lifetime giving please contact Anna Ridley at firstname.lastname@example.org or on 01892 506 151.