Gifting: How to reduce IHT liabilities
Moving £10,000 out an individual’s estate could save their heirs £4,000 in tax.
One of the easiest ways to reduce a future inheritance tax (IHT) liability is for individuals to give wealth away during their lifetime.
Gifting can be an effective way of saving individuals’ heirs a significant IHT bill.
For every £10,000 moved out of an estate while an individual is still alive. their loved ones could save £4,000 in tax. Lifetime gifting also gives individuals the opportunity to watch their wealth being enjoyed.
Here is a five-step guide to gifting to help individuals understand and make the most of the option.
1. Give every year
An effective way to reduce your estate is to know your allowances and take advantage of them every year. You can make an annual gift of up to £3,000, which can be divided up into any number of smaller gifts.
You can also make use of any unused gifting allowance from the previous tax year, so a couple could potentially remove a maximum of £12,000 from their joint estate immediately.
Small gifts of up to £250 can be made to as many people as you like. The only catch is that the same beneficiary cannot receive a small gift and any of your annual gifting allowance in the same tax year.
You can also make wedding gifts of between £1,000 and £5,000, depending on your relationship to the bride or groom. Be sure to keep records, so your executors can prove you have used your allowances. Completing a form IHT403 every year is one way to do this.
2. Invest in their future
Saving into a tax-efficient investment on behalf of a grandchild can help them with university costs, buying a house or saving for a pension. By setting up an investment such as a Junior ISA – maybe, topped up every birthday- you can reduce your IHT liability while helping them prepare for their future. If the gift is regular and from taxed income, it should enjoy the ‘gifts from income’ exemption.
To enjoy the most generous of tax breaks, think about paying into someone else’s pension for them.
If you gave a child £10,000 for their pension, this would be grossed up to £12,500 with basic rate tax relief. If they were a higher rate taxpayer, they could claim back a further £2,500 in their tax return.
This is considerably more tax-efficient than leaving the £10,000 in your estate where, with IHT, it would become £6,000. Additionally, with the money tied up until they are at least 55, they won’t be wasting it away.
3. Pay towards a mortgage deposit
The average first-time buyer needs a £29,218 deposit, according to the Halifax, so helping a child or grandchild onto the property ladder will be much appreciated.
It could stop them from having to rent, which is effectively paying someone else’s mortgage.
If they are living with you to help them save a deposit, it could help you get your home back.
4. Give away your valuables
Rather than hand over cash, you could give away belongings such as antiques, art or jewellery. If you leave them in your will, their value will form part of your estate.
Give them in your lifetime and, at the same time as reducing a future liability, you’ll have the pleasure of seeing someone else enjoy them.
Depending on the item’s value, it could take seven years to leave your estate for IHT purposes.
5. Give to charity
Leaving at least 10% of the net chargeable value of your estate to charity on death will reduce the IHT rate charged from 40% to 36%.
But there are tax benefits to giving in your lifetime too. Gift aid on donations means every £80 you give to charity is grossed up to £100, with higher rate taxpayers able to claim a further £20 in their tax return.
You could also give qualifying investments such as shares or unit trusts and you won’t have to pay any Capital Gains Tax on them.
Gifts to charities are exempt from IHT, so anything you give will be immediately outside your estate for IHT purposes.