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Get to Grips with Inheritance Tax Planning this Christmas

The Christmas season ushers in the end of another year, and for many people it can be a stark reminder that time is quickly moving forward.

Christmas is an opportunity to enjoy giving special gifts. These are sometimes treasured and valuable possessions, such as jewellery or paintings, which some people choose to pass on to their loved ones. It can also be money which is surplus to their income needs, because they want to enjoy seeing their family members benefit whilst they are still alive.

Giving at Christmas may be a very private affair. However, giving away money or valuable items is something which Her Majesty’s Revenue and Customs (HMRC) has an interest in, when it affects if and when Inheritance Tax (IHT) may become payable.
IHT (sometimes referred to as ‘death tax’) is the final tax bill which has to be paid by those who, at their death, leaves an estate worth in excess of £325,000 (the nil rate band) for the tax year 2015/16 (£650,000 for married couples). Whilst all of an estate can be left to a married partner on death without paying tax (so long as they live permanently in the UK),  should an estate (or part of it) be left to anyone else then the tax  due to be paid will be at 40% on assets which exceed the threshold.

To ensure families don’t avoid paying the tax (for example by gifting an entire estate just before death), HMRC will add in the value of  any gifts given in the seven years prior to death when calculating the value of the estate to determine if, and how much, tax is due. The amount of tax payable on these gifts will vary depending upon how many years prior to death they were made (from 8% if made 6-7 years prior to death, to 40% if made in the three years prior to death) and whether there is any nil rate band left.
Inheritance Tax used to be a concern for just very wealthy families, yet rising house prices throughout the UK, especially in the South of England mean that more and more families are affected.  It can be very distressing to be forced to sell a treasured family home or heirlooms such as items of jewellery or furniture in order to pay an inheritance tax bill on the death of a loved one.

And according to the Chancellor, we won’t see an increase in the Inheritance Tax Threshold for some time, the only additional benefit being the proposed  ‘additional’ tax allowance which will become available in 2017, and will apply when a main residence is passed on to certain family members upon death.

So, whether you believe your Inheritance Tax liability to be large or small, Christmas followed by the start of a New Year, can be an opportunity to start to reduce the size of your estate if you can comfortably afford to do so, whilst giving yourself a significant amount of joy in watching loved ones benefit.

Gifting Money This Christmas: Our Tips

Get advice first. Good gifting should be beneficial for both the giver and the recipient; the rules can be complex so get advice to make sure you are not incurring other liabilities (such as Capital Gains tax – see www.gov.uk for further information) by giving away your assets.

Start to give money away. Many people still don’t know that they can make gifts out of regular income. This can be an excellent method of passing wealth on to the next generation and, providing the gifts pass three key tests, they will not incur an Inheritance Tax liability.
1. the gifts must be made out of income (as opposed to selling assets to fund them);
2. they must be made on a regular basis and
3. they must not reduce the donor’s standard of living. You can find out more by visiting www.hmrc.gov.uk.

Make your gifts sooner rather than later. Any gift given more than seven years before the death of the donor is free of Inheritance Tax – a good example of the need to plan early. Remember though, that ‘gift with reservation’ rules apply: if you are giving something away, you cannot continue to enjoy the benefit of it. For example, you cannot give your house to your children and continue to live in it.

But some gifts are more equal than others. Certain gifts are treated differently, and in this case the ‘seven year rule’ doesn’t apply. For example, both parents can give up to £5,000 to their children when they marry or enter a civil partnership or £2,500 to grandchildren, and annual gifts of up to £3,000 can also be given. If you cannot give large sums of money then it makes sense to make use of these smaller gift allowances.

Make use of Trusts. Many people believe that Trusts are highly complicated and are only to be used for multi-million pound estates. Far from it. They can be simple and relatively inexpensive, yet still allow you to transfer wealth out of your estate and save Inheritance Tax into the bargain. Yes, you’ll need specialist advice, but the potential savings in tax will almost certainly cover the cost of that advice.

You should always speak to a Wealth Planner before you start gifting to ensure you are working within the limits, not incurring and other tax liabilities and that you are not in any way negatively impacting on your income. To find out a bit more about gifting please get in touch, we’d love to help.   

Date issued: 03.12.15

Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependent upon individual client circumstances and may be subject to change.

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Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.