Gift-giving can put a sizeable dent in your Inheritance Tax liability, even in these austere times
During this season of goodwill, it is not unusual for our thoughts to turn towards the giving of gifts and, even in the current climate of austerity, it is possible to make significant gifts that will reduce your future Inheritance Tax (IHT) liability.
The gifting rules are clear: everyone is allowed to make IHT-exempt gifts totalling £3,000 per year. One year’s allowance or part thereof can be carried forward if unused, and an unlimited number of individual gifts of £250 can be made to any number of persons; thereafter, IHT is payable on estates worth more than £325,000.
These allowances may be adjusted by the Chancellor of the Exchequer in his annual Budget, and could well be subject to change in the event of a change of government – traditionally, IHT bills are lower under the Conservatives than under Labour.
Significant gifts are treated as a potentially exempt IHT transfers (PET) and, provided you live for seven years after the date of the gift, on your death its value falls out of the IHT calculation. For example, if you gift £100,000 absolutely, this amount will be deducted from your exemption of £325,000; if you live for seven years after making the gift, the full IHT exemption limit is restored; if you do not live for seven years after making the gift, a sliding scale of relief applies between three and seven years after the gift is made.
When making gifts it is also sensible to look at your overall mix of assets. Consider gifting those that are likely to grow in value significantly over the coming years, effectively stripping out future growth potential from your estate.
When selecting an asset to gift, it can be a good idea to choose one that is currently at the lower end of its value and therefore has strong recovery potential, rather than picking an investment that is at the peak of its value and therefore more likely to depreciate over time.
IHT planning should be considered early and is best carried out progressively. If necessary, start gifting conservatively and set strict affordability criteria. Care should also be given to assess carefully the circumstances of the recipient of your gift. If, for example, a child is in the middle of matrimonial proceedings, it might be prudent to not to gift to that child absolutely but consider establishing discretionary trust.
John Atkinson. Chartered Wealth Manager
General, George Ide, Investment, News, Private Client