Gifts make for a powerful tool when it comes to minimising your inheritance tax (IHT) bill.
As well as helping you reduce any tax payable on your estate, they also let you support your family and share in the support that gives them.
It’s important to understand how HMRC looks at gifts because the rules are quite specific and you could easily leave an unintended IHT payment on your estate.
There are several exemptions which can be used every tax year, to give gifts. These are:
- The £3,000 annual exemption:You can give your allowance away every tax year without it being added to your estate.
- Weddings or civil ceremonies;You can give £5,000 to a child, £2,500 for a grandchild or great-grandchild or £1,000 to other people
- Living costs:Gifts to help someone with their living costs – for instance, an elderly relative or child under 18 – are exempt.
- Charities and political parties
- The small gifts exemption:You can give up to £250 per person each tax year.
All of these exemptions can be combined, except for small gifts. These must be the only exemption you use for that person.
Perhaps the most flexible exemption, however, are gifts from your income. If you have income from investments, an annuity or even part-time work, any money you can give away from your regular income, whilst maintaining your standard of living, is exempt.
Leave more than a trace
The unglamorous, but just as important, aspect of giving gifts, is keeping good records. Whilst you may know every penny given away was provided for under the various exemptions, it will be for your executors to prove that to HMRC.
Gifts not covered by these exemptions are charged IHT on a sliding scale up to seven years after you die, and any money you give away less than three years before you die is eligible for the full 40% tax.
If you want to discuss the tax planning of your gifts, or how to help prepare your accounts for your executors, please get in touch.