When thinking about gifting in a financial planning sense, most people think of what are called “potentially exempt transfers”. These are gifts that one can make free of them being exposed to Inheritance Tax, so long as the giver survives seven years – hence the term “seven-year gifting rule” (IHT applies in a staggered fashion if they do not).
This (potentially) unlimited gift will clearly be a big part of many people’s strategies. However, there are several other tax allowances for gifts which might prove a highly useful way to pass wealth down the generations (or to anyone else of your choosing) tax-efficiently.
Currently, you are able to give away £3,000 each tax year in gifts to a recipient, but since this is an individual allowance, a couple may gift up to £6,000. This allowance can also be brought forward (once) by “borrowing” from the coming tax year’s allowance.
It is also allowed to make gifts on the occasion of a wedding or civil partnership, in the year the ceremony takes place. This can be £5,000 if gifting to a child; £2,500 to a grandchild or great-grandchild; or £1,000 to any other person (you can even gift £2,500 to your new partner if you are the one getting married). You might also add this wedding gift to the normal gift allowance to make a £8,000 gift free of IHT.
Next are regular gifting patterns. You can also make regularly paid gifts to anyone of your choosing – with no limit on the amount – as long as these gifts are regular payments which demonstrably don’t diminish your own living standards or force you to sell assets to make them. These conditions satisfied, such gifts “out of income” can be a highly strategic option when it comes to taking money out of your estate for IHT purposes.
You can also make gifts to spouses, minor family members and dependants who are not related to you if the monies are for their maintenance or education with no IHT exposure being created, as well using the small gift allowance, which allows for up to £250 per person each year (as long as this person hasn’t been a beneficiary of another gift which a relief was applied to).
It goes without saying that keeping full records of payments made, their dates and deployment will be essential, as will documenting income and living expenditure if you are taking advantage of out of income gifts. With this in place and a professional on hand to keep you abreast of any rule changes, it is easy to see how gifting can usually be leveraged a lot more by most affluent people.
Taking advantage of the allowances for gifts can, over time, make a very valuable contribution to your IHT mitigation strategy. However, there are quite complex rules to follow and documentation to keep if you are to use these allowances effectively.
There are many twists and turns to the tax rules, and lots of ways to reduce your Inheritance Tax and other tax bills which are quite legal and widely deployed. If you would like to learn more about your options from a real expert, get in touch to learn more about the financial planning advice we can arrange.