Vital rules for gifting wealth to avoid inheritance tax sting

Graham Southorn shares inheritance tax tips

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Inheritance tax (IHT) is a tax payable on money, savings and any other assets a person passes on when they die. However, while there are certain lifetime gifts that are exempt, there are also some vital rules people must follow if they want to utilise the allowance.

Inheritance tax is charged on a person’s estate if the total value of assets exceeds £325,000. This is the current tax-free threshold for the 2022-23 financial year.

The estate figure is confirmed after the value of the person’s assets (cash, property, personal possessions and investments) are added together.

If the total worth of assets exceeds £325,000, a 40 percent tax is applied to the rest of the estate. However, there are some ways to increase this.

What are the main inheritance tax allowances?

As mentioned, every person has a Nil-Rate Band Allowance (NRB) of £325,000, but for married couples or civil partners, it’s £650,000. There is a further Residential Nil-Rate Band (RNRB) available of £175,000 per individual (the RNRB is qualification based, and some individuals may not benefit).

This can, in effect, mean that a married couple or civil partnership could leave £1million of their estate to beneficiaries tax-free. Anything over this amount would be subject to the 40 percent tax.

Another way to boost the tax threshold is through gifting.

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What gifts can be made?

According to Max Sullivan, Wealth Planner at Kingswood, people can make gifts of up to £3,000 each financial year (in total, not per recipient) and if people don’t use this in one tax year, any leftover allowance can be carried over to the next year.

However, Mr Sullivan said: “If you do this, you have to use up all your allowance in that tax year – you can’t accumulate several years’ worth of allowance and use it up in a single gift.”

Gifts of up to £250 per person per financial year to any number of people are also exempt from the tax.

Each parent of a bride or groom can gift up to £5,000; grandparents or other relatives can gift up to £2,500 and any well-wisher can gift £1,000. Gifts to registered charities and political parties are also exempt from IHT.

Mr Sullivan said: “If you wanted to make larger gifts during your lifetime, you will typically fall into two distinct categories, and it’s crucial to understand the difference.”

The two categories include:

  • Potentially Exempt Transfers (PETs): This enables a person to make gifts of unlimited value, which can become IHT-free if they survive a period of longer than seven years.
  • Chargeable Lifetime Transfers (CLTs) – A person can only gift up to a maximum of £325,000 NRB every seven years, without incurring a Lifetime Tax Charge of 20 percent.

Mr Sullivan said: “Calculations in this area are incredibly complex, and professional advice and guidance should always be sought.”

Delving into the rules on unlimited value gifting, Heather Pollard, head of underwriting at Tower Street Finance previously told “If the donor dies sooner [than seven years after assets were gifted], the tax will be charged on the gifts at various levels if the Inheritance Tax threshold is reached.”

The gift would be taxed at the following rates:

  • If the person dies within three years of giving the gift: 40 percent
  • If the person dies within three to four years: 32 percent
  • If the person dies within four to five years: 24 percent
  • If the person dies within five to six years: 16 percent
  • If the person dies within six to seven years: 8 percent
  • If the person dies after more than seven years: 0 percent

However, Mr Sullivan provided one top tip people should do if they’re hoping to utilise tax-free gifting to pass on wealth.

He said: “Always, always, always keep records of any gifts you make. A simple record of when you made the gift, what it was for, and the amount should usually be enough.”

Chancellor Jeremy Hunt will be unveiling the much-anticipated Autumn Statement on Thursday, and it’s thought he’ll be addressing the IHT threshold – an area that’s caused much controversy over the years.

Mr Sullivan continued: “It’s likely the Chancellor will look to inheritance tax as a potential public spending deficit ‘plug’.

“Most importantly, individuals should seek professional advice and guidance before considering gifts and/or inheritance tax planning. Inheritance tax affects the majority of UK individuals in one way or another.”

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