MAKING A GIFT TO SOMEONE, WHATEVER THE REASON, NEEDS TO BE PLANNED OTHERWISE THE RECIPIENT COULD GET AN UNWELCOME SURPRISE

Tax efficient gifting

For many, making a gift, whether of money or an asset, can be a way to address the size of their estate and potentially reduce their Inheritance Tax (IHT) liability.

Whether gifting is a suitable route for you can be tested with cash flow modelling as this can give you a projection of what your future financial needs might be. It can allow you to consider whether you would have enough income and/or capital to maintain your usual standard of living and cover any future liabilities while making gifts from any surplus.

Some gifts are immediately exempt for IHT purposes, such as ‘gifts from normal expenditure out of income’ and there is an annual gift exemption of £3,000 per person.

Some recipients are known as ‘exempt beneficiaries’: there is no IHT to pay on gifts between spouses or civil partners (as long as you are legally married or in a civil partnership and they’re UK residents), or to charities or political parties.

If, however, you give away a gift that you’ll still benefit from, it will count towards the value of your estate. Known as ‘gifts with reservation’, this could include giving a home to a relative whilst you still live there.

Timing is everything

What and how much you give to children or other relatives is entirely up to you but timing is everything.

Unless a gift is immediately IHT-free because of one the exemptions, most gifts are called Potentially Exempt Transfers (PETs). No tax is paid up front, irrespective of the size of the gift, as at this stage it assumes you will live for another seven years and the gift will become exempt.

If you don’t live for seven years after making the gift, the recipient might have to pay IHT. But, importantly, you are in no worse a position if you don’t survive the seven years for the gift to be exempt – the IHT position is just the same it was before.

Get your records straight

Although it’s important to keep accurate records of all gifts made, it’s extremely important to do so with gifts you believe may be exempt, otherwise IHT might become due when you die.

As with all things financial, it is a great idea to check with your Financial Planner if you are thinking about making gifts.

But it’s not just keeping records of gifts that can benefit you. Getting your financial assets in order generally can give you greater control over your money and hopefully greater motivation to keep matters in check.

Knowing your income and expenditure will help you see where you could make changes that allow you to save money. Amending your Will when there’s a change in your life circumstances (or making one in the first place!) will mean your money and assets will go to those for whom it’s intended.

One of the quickest financial housekeeping wins is to make sure the key people know where all your important information is – and remember to include an inventory of your digital assets too. Having details written down and stored safely (with at least one trusted person knowing where it is) will help save a lot of time and anxiety.

It’s important to keep a record of any gifts you make – give your Financial Planner the detail so they can keep all your records in one place. This means that when the time comes, probate could be quicker.