Top 10 gifting ideas
One of the easiest ways to reduce a future inheritance tax (IHT) liability is to give your wealth away. But, while the act of giving can be extremely satisfying in its own right, beating the taxman can make it even more rewarding.
While it's important not to give away money you may come to need, passing on any cash you can spare could save your loved ones a hefty tax bill.
If your estate is worth more than £325,000 (known as the nil-rate band) when you die, you will be taxed at a swingeing 40% (although rules allow married couples and those in civil partnerships to pass any unused allowance to the surviving partner - effectively giving them a combined allowance of £650,000).
So if it's looking like you could be passing on a tax bill to your beneficiaries (bearing in mind that your home could potentially swallow up your nil-rate band), for every £10,000 you're able to squeeze out of your estate while you are still alive, you'll save your loved ones £4,000 in tax.
But, as well as the financial incentive, Jason Witcombe, chartered financial planner at Evolve Financial Planning, says that doing this can be really enjoyable too. "Give your money in your lifetime and you can see it being put to good use. This can be much more satisfying than leaving it all tied up in a will," he adds.
To help you achieve this in as tax-efficient a way as possible, check out our top 10 ideas for giving away your wealth.
1. Be generous (and tax-efficient) every year
An effective way to reduce your estate is to know your allowances and take advantage of them every year. These include an annual gift of up to £3,000, gifts of up to £250 to as many people as you like and wedding gifts of between £1,000 and £5,000, depending on your relationship to the bride or groom.
But although the allowances are well-known, Matthew Brown, private client partner at Thomas Miller Wealth Management, recommends documenting everything you give away. "Keep records as it'll be the only way your executors will be able to prove you used the allowances,"
he explains. "Although it's intended for your executors, completing a form IHT403 every year is a great way to keep a record of these gifts."
2. Help out with education fees
Whether it's for school, university or lessons in anything from playing the piano to high diving, contributing towards a child or grandchild's education can make a sound investment.
And if you pay regularly out of your taxed income and by giving it your lifestyle isn't compromised, you can take advantage of the gift out of income allowance, making it instantly outside your estate for IHT purposes.
3. Give to charity
Although leaving at least 10% of the net value of your estate to charity will reduce the IHT rate charged from 40% to 36%, Tony Mudd, divisional director, tax and technical support at St James's Place Wealth Management, says 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," he explains. "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."
In addition, as gifts to charities are exempt from IHT, anything you give will be immediately outside your estate for IHT purposes.
4. Give away your valuables
Rather than hand over cash, Sian Thompson, head of private clients at law firm Simpson Millar, suggests giving away belongings. "Many people have items such as antiques, art or jewellery they'd like to pass on to someone special," she explains. "Left in a will, the value of these items will form part of your estate but, give them in your lifetime and, as well as reducing a future liability, you'll have the pleasure of seeing someone else enjoy them."
Depending on the value of the item, it could either take seven years to leave your estate for IHT purposes or form the small gift exemption if it's worth less than £250 or the annual exemption if less than £3,000.
5. Support a student
As well as supporting our relatives through higher education, it's also possible to set up bursaries and scholarships to help students who aren't so well off or are particularly gifted. Ella Searle, planned giving manager at Bristol University, says she's seen a lot more interest from people who want to support students since tuition fees increased to £9,000.
"You're looking at a five-figure sum each year to fully fund a student including course fees and a living stipend but smaller amounts can and are accepted," she says. "It's worth speaking to your university to see what options are available." What's more, as universities are exempt charities, any gifts to them will be immediately outside your estate.
6. Invest in your grandchild's future
University debts, mortgage deposits and pension provision can make starting out in adult life a bit of a financial steeplechase. Saving into a tax-efficient investment on behalf of a grandchild can help to remove some of these obstacles.
This is exactly what 65-year-old Michael Green from Derbyshire did when his three grandchildren were born, setting up child trust funds for the two eldest, Isabelle and William, and a junior Isa for the youngest, Jasmine. These are topped up each year on their birthdays.
"It helps to reduce my IHT liability but it will also help them through university or with a mortgage deposit," he adds. "I wouldn't want them to be loaded up with debt before they even got started on their adult lives."
Give regularly and out of taxed income and you can also take advantage of the gifts from income exemption, too.
7. Pay towards a mortgage deposit
With the average first-time buyer needing to pull together £29,218 for a deposit, according to figures from the Halifax, helping a child or grandchild on to the property ladder can be a much appreciated hand-out.
As well as reducing your estate, it can bring other benefits, too, as Witcombe explains: "It could stop them from having to rent, where they'd be paying someone else's mortgage and potentially missing out on property price inflation, or, if they're living with you to help them save towards their deposit, it could help you get your home back."
8. Pay someone’s pension
If you really want to maximise tax breaks, think about paying into someone else's pension for them. Tying up this money until they're at least 55 can help to ease any fears that they might fritter the cash but it can also be extremely tax-efficient.
For example, say you decide to give a child £10,000 for their pension. This would be grossed up to £12,500 with basic-rate tax relief as things currently stand, and if they were a higher-rate taxpayer, they could claim a further £2,500 in their tax return.
Witcombe adds: "It's much more tax-efficient than leaving this money in your estate where £10,000 could easily become £6,000 if it was hit with a 40% IHT charge." Tax breaks aside, as your beneficiary won't be able to access the money until they are 55 at the earliest, your contribution can also look forward to years of investment growth.
Stashed away in a pension this money will benefit from tax-efficient growth. For instance, according to figures from Legal & General, £10,000 in your 25-year-old son or daughter's pension would be worth £18,000 in today's money when they reached age 55, £20,700 at 65, or £23,800 at 75.
9. Clear their debts
Unless you're worried it's throwing good money after bad, Witcombe says you might want to use your cash to wipe the slate clean for a child or grandchild. "You might have plenty of cash tucked away but your children and grandchildren might be struggling to achieve their dreams or even pay the bills," he says. "It could even be the helping hand that inspires them to be much more prudent with their own finances."
10. Support your passions
Whether you love the theatre, a particular museum or your local amateur rugby club, chances are they're crying out for financial donations to help fund their activities. The size of these organisations means that many are able to offer additional recognition for your support, for instance plaques on seats or invites to special events.
Gifts of this nature are also tax-efficient. As well as being exempt from IHT, gift aid can help to swell the size of the donation. However, Mudd recommends checking the details if you're making a donation from your capital. "If the charity claims back more gift aid than you pay in income tax, you will end up with a tax bill for the difference. If there's a risk of this happening, make it clear when you make the donation."
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.