Last year, the Treasury collected more than £5 billion in inheritance tax, making it one of Britain’s highest streams of national income since the early 1980s. Rising property prices are dragging middle-class families into the IHT net and if you do not want the Chancellor to be the biggest benefactor from your estate, now is the time to think about giving it away.
In today’s economic climate, making gifts to younger family members makes a lot of sense. As well as reducing the value of your estate, it provides much-needed help to a younger generation that is struggling to get by on salaries that have not yet recovered to their pre-recession levels.
Making gifts is also one of the simplest forms of IHT planning you could undertake.
Business property such as unquoted shares and other assets can attract 100% relief and these would normally be treated as part of a business succession plan. However, for non-business assets, everyone can give away a certain amount without any IHT consequences. You can give up to £3,000 a year and also carry over any unused allowance from the previous tax year. This means a couple could reduce their estate by £12,000 in the first year and £6,000 in every subsequent year.
You can also give up to £250 a year to any number of people, provided another exemption isn’t also being claimed for gifts to the same person.
The marriage of younger family members is another good opportunity to reduce your estate. Each parent can give up to £5,000. Grandparents can each give £2,500 and anyone else can give £1,000.
If you have a larger estate and need to reduce it by more substantial amounts, you can make gifts of cash or assets in excess of the above allowances. These are known as potentially exempt transfers because, if you remain alive for seven years after making the gift, it falls outside your estate for IHT purposes. If you die within the seven-year period IHT may be due, but it can reduce according to the time elapsed since the gift was made. The earlier you start planning, the more your family will save.
It seems an obvious point, but those who need to reduce their estate, should also make sure that they are not unwittingly adding to it. So if you have a good pension and your retirement income exceeds your lifestyle needs, increased savings may be adding to your heritable estate. As long as you retain sufficient funds to meet your needs, you can make regular payments from excess income without any IHT consequences. This is a complex relief, but it can be used to help with long-term commitments such as school fees for grandchildren. However, if you do undertake this form of estate planning, you will need clear supporting documentation.
If you provide financial support for dependent relatives, this may reduce the value of your estate. Gifts to support spouses, civil partners, children or parents who rely on you because of age or infirmity, will not attract IHT. For example, you can make payments for the maintenance, education or training of your children if they are in full time education or aged under 18 – a useful form of assistance given the cost of a university education.
If, after giving all you can to family and friends, you still have the philanthropy bug, there are a few other tax-efficient ways to make gifts. Agricultural property, woodland and heritage assets can qualify for tax relief, as do gifts to charities.
Finally, in a time of such political and economic change, it is worth remembering that gifts to political parties can be made tax free under certain conditions – however, for some that may still feel too much like making the Chancellor a benefactor from their estate.
Inheritance tax planning is an important but complex area and for bespoke advice please speak to your usual Wilkins Kennedy contact.