17/09/2024
Tax efficient giving
Gifting assets during your lifetime is a hot topic at the moment and rightly so, as it can have a significant impact on the potential future Inheritance Tax bill on your estate, regardless of what changes are made in the budget. That said, not all gift giving is treated the same for tax purposes, so it is important to understand the rules to prevent any unwanted tax surprises for the recipients of your gifts or, even worse, paying more tax as a result of your gifting than if you had simply done nothing at all.
The fundamentals of Inheritance Tax planning are simple – establish the nil rate bands available to you (up to £1 million as a couple with a combined estate less than £2 million and a home to pass to children/grandchildren) and try to reduce your estate to as close to that amount as possible. If your estate is already below this, then gifting during lifetime for tax purposes is pointless, as it won’t save anything (but could cost you other taxes!)
If you can’t get to the £1 million (or lower), reducing the estate below £2 million can be the next target, as this can ensure full qualification for the residence nil rate band, assuming you meet the other conditions for this. If £2 million is a challenge then broadly any amount you can reduce your estate by would potentially save 40% Inheritance Tax (36% if your will includes gifts to charity so your estate qualifies for the reduced rate).
It should be noted however that giving away assets is a deemed disposal at market value for Capital Gains Tax, so you may be saving Inheritance Tax with your gift but costing yourself Capital Gains Tax instead. If we take a UK residential property that you rent out as an example, you might conclude that a 40% saving on the whole value of say residential property is worth a 24% cost on the gain, but you should note that unless they meet a specific exemption, gifts are not immediately outside of your estate for Inheritance Tax purposes. If you die within 7 years it is therefore possible that you could be paying Capital Gains Tax on the gain AND Inheritance Tax on the full value. If there is a mortgage on the property, you could also find you have Stamp Duty Land Tax to pay too. Also the rental income would need to be paid to the recipient of the gift, which could leave you short of cash.
There are a number of gifts you can make within the Inheritance Tax exemptions, such as wedding gifts and Christmas presents (within set monetary limits). There is also the extremely valuable ‘regular gifts out of income’ exemption which has no set limit other than ‘excess income’, so will be different for everyone. These gifts are not subject to the 7 year rule, they are immediately outside of your estate for Inheritance Tax purposes, so they can be very helpful in preventing an already sizeable estate growing in value.
To summarise, before making any gifts it is important to be aware of all the tax implications, so that you actually achieve what you are aiming to and don’t create any unwanted tax charges.
If you would like to understand you Inheritance Tax position currently and discuss what options might be available to you, please call 023 8046 1259 or email Gemma Hedges.