Avoid gifts to the taxman
AS THE end of the tax year looms on April 6, families worried they will be caught out by Chancellor Rishi Sunak’s inheritance tax freeze should be looking to reduce their exposure by gifting.
Parents and grandparents can help younger family members get on in life by taking advantage of inheritance tax (IHT) allowances to pass money on without HM Revenue & Customs grabbing a slice.
Yet a number of these expire at the end of the financial year, reducing the amount you can give away while avoiding the hated 40 per cent death tax.
In last year’s Budget, Sunak froze IHT nil-rate bands for five years, at £325,000 plus another £175,000 for families passing on their main residence to direct descendants such as children and grandchildren.
This “stealth tax” will drag more into the net as house and share prices rise. Mike Hodges, tax partner in the private wealth team at Saffery Champness, said: “IHT is a deeply unpopular tax but boosted Treasury coffers by £5billion in the year to January. That’s an incredible £700million than the year before.”
Gifting is a good way to shrink your exposure, provided you do it carefully, said Quilter financial planning expert Heather Owen: “Every adult can gift a maximum £3,000 each year with no IHT to pay, so couples can combine their allowances and gift £6,000.”
You can mop up unused allowance from last year, so couples could gift £12,000. Everyone can make smaller gifts of £250 to as many people as they like, provided they have not benefited from the £3,000 limit.
Parents can also gift £5,000 if any of their children are getting married.
You can also gift £2,500 to a grandchild or great-grandchild on marriage, and £1,000 to another relative or friend.
You can make regular payments to help with another person’s living costs, known as “normal expenditure out of income”, provided it does not affect your own standard of living.
Further gifts are known as “potentially exempt transfers” but are only entirely IHT-free if you live seven more years.
Charitable donations could reduce your overall IHT liability from 40 per cent to 36 per cent.
Yet gifting has its dangers so consider these issues first. If you gift cash it is difficult to get it back. Make sure you have enough money for later life and will not run out.
Consider future care bills too. If you need nursing home care but lack the funds to pay, you may have to sell your home and assets.
Watch out for divorce. If you give money to, say, a child who later divorces, their partner could take half. Death is also a risk, because if the recipient dies early, the assets will pass to their spouse or civil partner.
Consider gifting within a discretionary trust, where the funds are excluded from divorce settlements and creditors.
If you fear your cash will be squandered by a reckless recipient, think carefully before giving it away.
Mistakes could trigger a shock IHT bill, so consider taking specialist advice to make sure you get it right.