Giving gifts to relatives is a tradition that many of us are accustomed to but considering the tax implications is a process which is often overlooked. If your estate may be subject to inheritance tax (IHT). Thoughtful planning can ensure that your generosity is both meaningful and tax-efficient.
Understanding Tax-Free Allowances for Gifts
In England and Wales, individuals have several allowances and exemptions that can be used to reduce or eliminate the inheritance tax liability on gifts:
- Annual Exemption: Each individual can give up to £3,000 per year without impacting their estate’s IHT liability. If the previous year’s allowance was unused, it can be carried forward, allowing up to £6,000 of tax-free gifting in one year.
- Small Gift Exemption: Gifts of £250 or less per person per tax year are also free from IHT. However, if additional gifts exceed £250 to the same person, the exemption no longer applies.
- Potentially Exempt Transfers (PETs): Larger gifts fall under this category. PETs will only remain free from IHT if the gift giver survives for seven years after making the gift. If the donor passes away within that time frame, the value of the gift may be subject to tax, depending on the size of the estate.
Structuring Gifts for Long-Term Tax Efficiency
For those with estates above the inheritance tax threshold (currently £325,000 per individual or up to £1,000,000 for married couples with children), careful planning is crucial. Tax-efficient gifting can help reduce the value of your estate and potentially lower the tax burden on your heirs.
Key considerations include:
- Timing of Gifts: Spreading out larger gifts over several years can help make use of annual exemptions and reduce exposure to PET rules.
- Gifting Assets: Gifting non-cash assets, such as property or shares, can also have tax implications and may require specialist advice.
- Additional Allowances: Certain allowances, such as the Residence Nil Rate Band for those leaving property to direct descendants, can further enhance tax efficiency.
Protecting Your Loved Ones from Unexpected Liabilities
The responsibility for paying IHT on failed PETs generally falls on the recipient of the gift. To avoid unexpected financial strain for your loved ones, it’s possible to structure your Will to shift this liability to the overall estate instead. Consulting a legal expert can ensure your Will includes the necessary provisions to align with your wishes and protect your beneficiaries.
Why Seek Professional Advice?
Navigating the complexities of tax-efficient gifting requires careful consideration of your overall financial plan, estate structure, and long-term goals. Working with financial planners and legal professionals can help you:
- Identify the most tax-efficient strategies for giving.
- Ensure compliance with current tax laws and regulations.
- Create a Will that reflects your intentions and safeguards your beneficiaries.
Whether you are making small gifts or planning significant transfers of wealth, seeking expert guidance can provide peace of mind and ensure that your generosity benefits your loved ones in the way you intend.
This article is for general information only and does not constitute legal or financial advice. For advice tailored to your specific circumstances, consult a qualified professional. The content of this article was originally published on www.dtmlegal.com.