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By gifting money or assets to your loved ones, you can take advantage of available tax breaks currently available. Gifting enables you to plan ahead and distribute parts of your estate to your beneficiaries, to reduce the amount of inheritance tax incurred when you pass away.
A gift is anything that deducts value from your estate. Gifts can include:
A gift can also be defined as something you sell for less than its actual value; for example, if you sell your vehicle or a property to a family member for a reduced amount, the difference is considered a gift.
Important - Tax rules can change and their impact on you will depend on your circumstances. The FCA does not regulate inheritance tax and estate planning.
Currently, you can give away up to £3,000 each tax year tax free. Anything above this will be potentially liable for inheritance tax. This is a total amount, not per person receiving the gift. Should you decide not to gift the full £3,000 in a year, you can carry the unused amount into the following tax year - but only for a year.
For example a couple having made no gifts in the previous tax year could gift up to £6,000 each (i.e. £12,000) in a single year. Alongside the £3,000 tax free allowance you can also gift your loved ones in the following ways:
The Small Gift Allowance
This is where you can offer as many gifts as you want up to £250 each tax year, per person, so long as you haven't used another allowance on the same person e.g., part of the £3,000 annual allowance. Both birthday and Christmas gifts are exempt from this rule. Gifting out of your regular income
Gifting out of your regular income, sometimes called the normal expenditure allowance; this is where you can make regular payments to another person, for example, to help with their living costs. There's no limit to how much you can give tax-free as long as it's paid from your regular income, it cannot come from capital, and taking into account the gifted amount the income left is enough to continue to fund your regular lifestyle. Other good ways to use the normal expenditure allowance is contributing to a child's Junior ISA or pension on a monthly basis as this establishes a pattern of regular gifting.
It is a good idea to keep a record of the gifts you make as this will help your executors complete the inheritance tax return. Update this regularly and keep it with your Will.
The gifts detailed above are exempt from inheritance tax from the time they are made and do not come back into account.
Gifts exceeding the available exemptions are potentially inheritance tax free. Any amount can be given and if the gift is made 7 years prior to the date of your death will fall outside of your estate. However, if you pass within seven years of making the gift it will need to be considered for inheritance tax with your estate assets.
Gifts considered on your death will be tax free if they fall within your Inheritance Tax Nil Rate Bands. If the gifts exceed the bands Inheritance tax is charged on the gift, But early giving has benefits as if there is a tax cost this is tapered if the gift is more than 3 years old. Taxable gifts given within three years of you passing away are taxed at 40%, while the tax on gifts given three to seven years before you pass are taxed on a sliding scale known as ‘taper relief’.
The impact of the 14-year rule is that certain gifts which were made more than seven years before death and consequently outside the estate, could still affect the amount of tax payable on later gifts which were within that seven-year period. This can be a complex area and underpins why good record keeping and advice is important.
When you lose capacity gifting becomes very difficult. Individuals who have legal power to make decisions on your behalf, such as power of attorneys or deputies, are very constrained in what they are allowed to do on your behalf.
The attorney can only make gifts on customary occasions, such as birthdays and Christmas, or to charities you may have previously supported. The value of those gifts must be reasonable based upon the individual circumstances of the donor, their financial future must not be compromised.
This could hinder any meaningful estate planning, as making large gifts with the intention of reducing the value of the estate may not be possible
Therefore, if you can afford to make gifts earlier on during your lifetime or take other steps to mitigate potential inheritance tax liability then this makes sense to explore with an adviser.
In Scotland the rules differ slightly. Under a Continuing Power of Attorney, it is possible for the donor to include specific provisions regarding gifting, granting the attorney the authority to make gifts.
Gifting can be an emotive and complicated process. Ascot Lloyd’s independent financial advisers can assist you with the entire gifting and inheritance tax process to create an effective financial plan. Your adviser will evaluate your financial circumstances and develop a plan that incorporates a gifting structure that is tax-efficient, compliant, and advantageous to you and your loved ones.
Get in touch with our expert team at Ascot Lloyd to learn more about your gifting options.
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If you speak to one of our financial advisers they can put in place a specific insurance policy which is called ‘Gift inter vivos’ this is an insurance policy designed to insure the life of the person who made the gifts, the life insurance would provide an amount to cover the tax on the gift. The policy typically has a 7 year term.
The main difference between an inheritance and a gift is the time at which the beneficiary receives it. The majority of gifts are passed on during somebody’s lifetime while inheritance takes place after a loved one has passed away.
Our expert advisers can help you understand your inheritance options as well as assisting with end-of-life planning.
Executors need to inform HMRC about gifts when they deal with the death estate. That’s why, when gifting, keep a list of all the gifts, date of transfers and the value. If the total value of your gifts exceeds the nil rate band thresholds, you’ll have to pay tax on the gifts.
When dealing with your estate and assets, you’ll work closely with an executor who will collect all the necessary details about your estate. In order to move forward, your executor will submit a form with all your gifts to the HM Revenue & Customs, which simply informs them of any inheritance tax liabilities on your estate and assets.