GIFTING for Estate Planning

With Inheritance Tax receipts rising year on year, it is no surprise that estate planning is becoming a financial priority for many. Amongst the options available to mitigate a potential charge to Inheritance Tax, some choose to gift capital to family members to reduce the value of their potential estate. It is, however, important to seek advice before undertaking any estate planning, as the rules are complex, and actions taken can have unexpected consequences.

It is important to recognise that a gift needs to be outright to be effective for tax purposes. In other words, the person making the gift is not able to derive any benefit from the asset that is gifted. If they do, they are likely to fall foul of the reservation of benefit anti-avoidance rules.

Each individual has an annual gift exemption of £3,000, and a sum total of gifts below this level can be made each year without incurring a potential charge to Inheritance Tax in the future. In addition, if you haven’t made gifts in the previous tax year, this can be carried forward to allow a potential gift of £6,000 in a single tax year. You can also make small gifts of up to £250 per person each tax year, so long as you have not gifted to that individual under another allowance during the same tax year. Finally, gifts can be made to those getting married or entering a civil partnership. Parents can give £5,000 each, grandparents can give £2,500 each and you can give £1,000 to any other person.

There is no limit to the amount you can gift each tax year; however, any gifts made in excess of the annual gift exemptions could carry a potential Inheritance Tax charge. A gift that exceeds the annual gift exemption will escape your estate for Inheritance Tax purposes once you have survived more than seven years from the point the gift is made. If the person making the gift fails to survive seven years, the value of the gift will use up part of their nil rate band, which is the first £325,000 that you can give away on death before Inheritance Tax becomes payable.

Another way of making a gift without tax considerations is to make regular gifts out of surplus income. Such gifts can only be made out of income that is truly surplus, after all regular spending is taken into account. For example, if you have surplus income over expenditure of £10,000 per annum, and pay this amount each year to a grandchild to help pay for school fees, this is likely to be accepted as a regular gift out of surplus income. It is important to approach regular gifts out of income with a clear strategy in mind, and a financial adviser can help structure a schedule of gifts and help with record keeping.

Before planning to make gifts, it is important to assess your own personal financial position, to ensure that any gifts made do not damage your financial security. It is easy to underestimate potential costs that can arise in later life, such as care fees, private medical bills, or expensive home repairs.

Where some will have available cash to fund a gift, others may need to sell property or investments, which could create an unintended tax consequence for the one making the gift. Seeking independent financial advice can assist you to determine the most appropriate assets to sell, with the aim of keeping investments that have the potential to outperform, and minimise a charge to Capital Gains Tax.

Gifting assets is just one of a number of financial planning tools that can be used to reduce a potential Inheritance Tax liability. Speaking to an independent financial adviser can help you look at the available options and help you determine the most appropriate solution for your circumstances.

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