Saving Inheritance Tax – A gift from the Taxman
Updated: Mar 10
Saving Inheritance Tax is one of those things that most people would like to do. Unfortunately it is also something that the majority put off to another day, one that never comes. As a consequence the amount that the Exchequer collects from the Tax is now about £2.5 billion. For fairly obvious reasons more than 40% is raised from people who die in the South East of England. With the announcement that the amount that an individual can leave without paying tax is to be frozen to fund the Government’s Social Care reforms the tax is predicted to impact on more and more people.
Of course, there are some very elaborate (and expensive!) schemes for saving Inheritance Tax. However, for many whose estates are only marginally above the £325,000 that can be left without paying tax these schemes are often inappropriate. Saving Inheritance Tax can be achieved by such individuals by ensuring that they use the gift allowances that are available. In order to achieve the goal of saving Inheritance Tax it is important to ensure that the rules are followed.
Gifts from Income
If you are in the fortunate position to have surplus income then you can create a pattern of giving and these gifts will be ignored when Inheritance Tax is calculated. The gifts must come from income, rather than capital and they must not reduce your standard of living. The only limit on such gifts is the amount of surplus income that you have. As you will almost certainly have paid Income Tax on the income it would seem a shame to simply add it to your capital and then pay a further 40% Inheritance Tax on it when you die.
Everyone is entitled to make gifts from their savings of up to £3,000 each year without any risk of the amount of the gifts being added back to their estate if they should die within 7 years. Given the relatively modest amount (which has not changed for many years!) it may seem that this will not be very useful for saving Inheritance Tax. However, if one makes gifts of £3000 for each of 5 years the saving will be £6,000. It is worth remembering that if you do not use this allowance in one year you are entitled to carry it forward to the next.
You are entitled to give anyone a gift of up to £250 each year. There is no limit on the number of these gifts that can be made, but they cannot go to someone who has received a Capital Gift as outlined in the preceding paragraph.
A parent may give up to £5,000 to a child on their wedding. Grand Parents can make a gift of up to £2,500 and anyone else can give up to £1,000. This allowance also includes gifts made when an individual enters into a Civil Partnership. In order to justify this allowance the gift should be made shortly before the wedding or civil partnership ceremony.
Gifts to Charities
Any gift that you make to a registered charity is exempt from Inheritance Tax. Similarly you may make exempt gifts to universities, the National Trust, museums and Community Amateur Sports clubs.
If you make a gift and live for 7 years afterwards the gift will be exempt from Inheritance Tax regardless of its value. However you cannot continue to enjoy a benefit from something that you have given away and enjoy this particular allowance. So, for example, if you give away your house, but continue to live in it without paying a market rent the value of the house will be taken into account when Inheritance Tax is calculated. If you die within the 7 year period the value of any gift will be added back to your estate when Inheritance Tax is calculated.
If you propose making any gifts of the type mentioned above it is always useful to keep a careful record. This will help your Executors deal with HMRC when the time comes.
Saving Inheritance Tax
By making full use of the gift allowances is a relatively simple task. However it is always worth taking advice before embarking on a particular course as it may have unforeseen consequences The savings may not seem particularly large, but in effect HMRC is contributing 40% to each gift that you make. It is not often that we receive a present from the taxman.