How to reduce your Inheritance Tax Bill during your lifetime
Many people nowadays are familiar with the seven-year gift rule, under which you can make gifts completely Inheritance Tax (IHT) free if you live for seven years after the gift, unless the gift is part of a trust. When an individual is planning for their future and providing for their loved ones upon death, there are other types of lifetime gifts which can be useful tools to potentially reduce their IHT liability. A lifetime gift is a gift to a beneficiary made during the donor’s lifetime, without any conditions attached. It is important to know the various allowances and reliefs to plan effectively and reduce your Inheritance Tax during your lifetime.
Available reliefs
- Annual exemption
Each individual is entitled to give away £3,000 worth of gifts in any one tax year without suffering any IHT consequences. If this £3,000 exemption is unused or only partially used, you are able to bring forward the unused amount to add to the following year’s exemption.
- Small gift allowance
You can give away as many gifts of up to £250 to any number of individuals, without incurring IHT. You cannot use this allowance on a beneficiary if they have already received a gift of your £3,000 annual exemption, and this allowance can only be used once per person in each tax year.
- Gifts in consideration of marriage or civil partnership
You can make a tax free gift to someone who is getting married or entering a civil partnership. The amount you can gift is dependent on your relationship to the recipient:
- Up to £5,000 to a child
- Up to £2,500 to a grandchild or great-grandchild
- Up to £1,000 to any other individual
It is also possible to combine a wedding gift allowance with your annual exemption.
- Gifts out of excess income
If your income is sufficient to maintain your normal standard of living, you can make gifts from your surplus income without incurring IHT. Utilising this exemption requires careful record keeping of the gifts to prove they are regular and made from excess income. This exemption can be valuable for parents or grandparents wishing to provide for their family. The rules related to this exemption can be complex and we are happy to provide advice if you wish to consider this exemption for your IHT planning.
- Gifts for family maintenance
Gifts for family maintenance can be ignored for IHT, and can be made without the donor having to survive the seven year period that would normally apply to lifetime gifting. Gifts for family maintenance can include the maintenance of your children while they are under 18 or over 18 if they are in full time education, your parents or any relative of yours that is considered dependent on you for care.
Potential problems
There are many potential pitfalls that may be missed without appropriate advice including the following considerations:
- What is deemed normal expenditure and excess income?
- The implications of other taxes, including capital gains tax and income tax
- The potential detrimental impact of retaining a benefit of a gift once given away
- The impact of making a lifetime gift on a financial assessment for care home fees
- How different exemptions and allowances interact with one another
If you are considering making lifetime gifts, then it is important to think of the wider context along with your short and long term goals and you may need to seek legal advice. If you would like further assistance or information on how to reduce your Inheritance Tax during your lifetime, please contact our Succession and Tax team.
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