Gifting can be a satisfying way of saving your heirs a significant Inheritance Tax bill.
One of the easiest ways to reduce a future Inheritance Tax (IHT) liability is to give your wealth away during your lifetime. For every £10,000 you can move out of your estate while you are still alive, you’ll save your loved ones £4,000 in tax. Lifetime gifting also gives you the opportunity and pleasure of seeing your wealth being enjoyed. Here are some tax-efficient ways of doing it.
Give every year
An effective way to reduce your estate is to know your allowances and take advantage of them every year. You can make an annual gift of up to £3,000, which can be divided up into any number of smaller gifts. You can also make use of any unused gifting allowance from the previous tax year, so a couple could potentially remove £12,000 from their joint estate immediately.
You can make small gifts of up to £250 to as many people as you like. The only catch is that the same beneficiary cannot receive a small gift and any of your annual gifting allowance in the same tax year.
You can also make wedding gifts of between £1,000 and £5,000, depending on your relationship to the bride or groom. Be sure to keep records, so your executors can prove you used the allowances. Completing a form IHT403 every year is one way to do this.
Invest in their future
Saving into a tax-efficient investment on behalf of a grandchild can help them with university costs, buying a house or saving for a pension. By setting up an investment such as a Junior ISA – topped up every birthday, perhaps – you can reduce your IHT liability while helping them prepare for their future. If the gift is regular and from taxed income, it will enjoy the ‘gifts from income’ exemption.
To enjoy the most generous of tax breaks, think about paying into someone else’s pension for them. For example, you can pay £2,880 a year into a child’s pension, and this is grossed up to £3,600 by basic rate tax relief - even if the child is not working. Over just five years, you could give away £14,400 and with tax relief, the child would benefit by £18,000. This is considerably more tax-efficient than leaving the £14,400 in your estate where, with IHT, it would promptly become £8,640. And with the money tied up until they are at least 55, the child won’t be frittering it away.
Pay towards a mortgage deposit
The average first-time buyer needs a £29,218 deposit¹, according to the Halifax, so helping a child or grandchild onto the property ladder will be much appreciated. It could stop them from having to rent, which is effectively paying someone else’s mortgage. If they are living with you to help them save a deposit, it could help you get your home back.
Give away your valuables
Rather than hand over cash, you could give away belongings such as antiques, art or jewellery. If you leave them in your will, their value will form part of your estate. Give them in your lifetime and, at the same time as reducing a future liability, you’ll have the pleasure of seeing someone else enjoy them. Depending on the item’s value, it could take seven years to leave your estate for IHT purposes.
Give to charity
Leaving at least 10% of the net value of your estate to charity on death will reduce the IHT rate charged from 40% to 36%. But there are tax benefits to giving in your lifetime too. “Gift aid on donations means every £80 you give to charity is grossed up to £100, with higher rate taxpayers able to claim a further £20 in their tax return,” explains Tony Müdd, divisional director at St. James’s Place. “You could also give qualifying investments such as shares or unit trusts and you won’t have to pay any Capital Gains Tax on it.” Gifts to charities are exempt from IHT, so anything you give will be immediately outside your estate for IHT purposes.
¹ Halifax, January 2015
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.