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Inheritance Tax (IHT) and the Giving of Wealth – Explained | HaesCooper Accountants

19/09/2018

A YouGov survey of UK taxpayers showed that IHT (inheritance tax) was voted the most unfair UK tax – no surprise there – but what is surprising is that only a small proportion of UK taxpayers know what they can gift in their lifetime to make IHT an ‘avoidable’ tax.

Here at HaesCooper Accountants, we wanted to remind you that if you are a UK taxpayer and resident in the UK you are able to give away a certain amount of wealth during your lifetime, to avoid IHT.

Before you do this, you first must consider your financial circumstances and future financial needs are paramount before deciding on giving your wealth away.

To avoid the IHT tax when giving wealth to family members or charities, we advise you send ‘small gifts’ – i.e. small amounts of money spread across suitable time frames; this can be a very effective way to reduce the value of your estate for IHT purposes and thereby reducing the burden of future IHT.

What are the main IHT gifting provisions?

Gifts to individuals for weddings/civil partnerships – up to £1,000 per person. This limit is increased to £5,000 if it is your child or £2,500 if it is your grandchild.

Normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift – no limit.

Gifts to charities – no limit.

In addition to the above exempt gifts you can use the ‘small gifts allowance’ i.e. gifts of no more than £250 to individual persons per tax year. For example, in each tax year both grandparents could give £250 each to their grandchildren free of IHT- with 4 grandchildren that is a useful £2,000 per tax year free from IHT.

Annual Exemption Gift Limit

This leaves the ‘annual exemption’ gift limit of £3,000 per tax year-this is in addition to the previously-mentioned small gift allowance and the wedding/civil partnerships gifts to individuals. The £3,000 annual exemption is the total value of all gifts made in a tax year. If you do not use the £3,000 IHT free gift limit in one tax year you can carry over the unused limit to the following tax year. Please note: this is as far as you can carry over the unused annual exemption.

If you make gifts above the limits stated in the IHT gifting laws, the excess will be treated as potentially exempt transfer (known as a PET) and to avoid IHT you will need to live for 7 years from the date of the gift. However, there is tapering relief if you survive 3 years from the date of the gift.

It is important to have evidence of the details of the gift and date it is made – we advise issuing a simple letter to the recipient with a recorded paper trail from your bank account for the money gifted.

How We Can Help You

Did you know – there are additional inheritance tax reliefs available? At HaesCooper Accountants we’re can guide you and help you avoid this unpopular tax. We can also give you a review of your current IHT position and what planning could be available to you.

If you’re keen to know more about inheritance tax laws, please contact our friendly team for advice.