Tax Tip 9 : How to save Inheritance Tax by giving money away
“In this world nothing can be said to be certain, except death and taxes.” So said Benjamin Franklin. Ben was clearly an accountant at heart as he also uttered the “remember that time is money” quotation that many a bean counter has told a client (but not us of course). He is also the face of the $100 Bill.
Under current HMRC rules you may have to pay tax after your death, in the form of inheritance tax (IHT). The rules are complex. Not everyone pays Inheritance Tax. It is only due if your estate - including any assets held in trust and gifts made within seven years of death - is valued over the current Inheritance Tax threshold (£325,000 in 2010-11). The tax is payable at 40 per cent on the amount over this threshold.
Married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2010-11. Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.
A common approach to minimising inheritance tax is to “gift” money or assets away while you are still living. If you are still alive 7 years after the gift, then congratulations! The value of what you have given away doesn’t get included in the value of your estate for IHT purposes. However if you die within the 7 year period, then part of the value of the gift will be added back to your estate.
The taxman isn’t all bad and has provided a couple of concessions where you can make gifts that are exempt from IHT regardless of when you pass away.
Annual payment to your children or grandchildren
You can gift £3,000 per year to your children, grandchildren (or anyone else for that matter), and the payment is exempt from inheritance tax. Note that £3,000 is the maximum payment and is not a “per child” You can carry forward any unused part of the £3,000 exemption to the following year, but if you don’t use it in that year, the carried-over exemption expires.
Wedding gifts/civil partnership ceremony gifts
Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:
• parents can each give cash or gifts worth £5,000
• grandparents and great grandparents can each give cash or gifts worth £2,500
• anyone else can give cash or gifts worth £1,000 You have to make the gift - or promise to make it - on or shortly before the date of the wedding or civil partnership ceremony.
If the ceremony is called off and you still make the gift - or if you make the gift after the ceremony without having promised it first - this exemption won't apply.
You can make small gifts up to the value of £250 to as many people as you like in any one tax year. However, you can’t give a larger sum and claim exemption for the first £250. You can’t use your small gifts allowance together with any other exemption when giving to the same person.
Regular gifts or payments that are part of your normal expenditure
Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle. These include:
• monthly or other regular payments to someone
• regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries
• regular premiums on a life insurance policy - for you or someone else
You can also make exempt maintenance payments to:
• your husband, wife or civil partner
• your ex-spouse or former civil partner
• relatives who are dependent on you because of old age or infirmity
• your children, including adopted children and step-children, who are under 18 or in full-time education
As always, you should take professional advice from an expert when considering your options to minimise IHT. More details on the basics of IHT are here. http://www.hmrc.gov.uk/inheritancetax/index.htm