Gifts for your loved ones, not the Inland Revenue
TAX. THE bane of all our lives. And however unjust you might consider income tax to be, there’s more in store, as inheritance tax could also be payable when you die. This means your hard-earned savings and lifetime investments — on which income tax has already been paid — could be subject to further tax on exactly the same assets.
Inheritance tax (IHT) is payable on the value of your taxable estate when you die. But in calculating your taxable estate there are two main exemptions — sums left to a spouse, and legacies to charity (both without limit). Assets left to others are free of tax up to the IHT threshold, which is currently £325,000 per person, and the remaining assets are charged at a rate of 40 per cent. However, this can be reduced when ten per cent of the net estate passes to charity, invoking a lower IHT rate of 36 per cent.
In the case of a husband and wife, therefore, no IHT is payable on first death. However, the unused £325,000 threshold of the deceased spouse may be transferred to the surviving spouse, increasing the IHT threshold to £650,000 on second death.
In 2017 the government introduced a further top-up to the IHT threshold by way of a “residence nil-rate band”. Where residential property belonging to the deceased passes to children or grandchildren, a possible additional £175,000 each (£350,000 per couple) is available which can potentially bring the IHT threshold to £1 million per couple. However, a number of criteria must be met, which this article does not allow space to explain.
Inheritance tax is payable on the value of your estate when you die. A key way of avoiding this tax is to give away assets during your life. But beware! Lifetime gifts made within seven years of death (to anyone other than your spouse or a charity) will normally become taxable. Furthermore, lifetime gifts from which you “reserve a benefit” (eg gifting your home to your child but continuing to live in it) will not be regarded by HMRC as gifts at all.
In other words, as long as you continue to benefit from the asset gifted, HMRC will still treat it as your asset.
There are several other ways of making gifts during your lifetime that won’t attract IHT. You can give £3,000 per year to individuals without the seven-year rule applying. Gifts can be made out of regular income but must be surplus to what you require and should form a regular pattern, as opposed to a one-off payment. Gifts to political parties are IHT-friendly for those who are inclined to make use of this exemption — although in my experience not many people opt for this. National heritage assets, both land and objects, can also be gifted without fear of IHT.
It is important to take into account both the IHT consequences and the lifetime tax-planning opportunities when writing your will. With proper advice and planning of lifetime financial affairs and will-related matters, it should be possible to reduce the IHT bill or wipe it out completely. This will ensure assets which would otherwise go to the taxman are given to your beneficiaries instead.
Certain categories of lifetime gift will not attract IHT’
Carolyn Addleman is director of legacies JNF UK. JNF UK’s legacy department, KKL Executor & Trustee Co, has been serving the community with executorship and trustee services for more than 70 years, 0800 358 3587, enquiries@kkl.org.uk