How to gift tax efficiently
Gifting money to friends or family can be a good way to avoid a nasty inheritance tax bill, but you need to stick within certain limits to keep the taxman happy. Moneywise TV explains.
Unless you plan carefully, any assets over £325,000 will be taxed 40% after your death. If you are the surviving spouse you will inherit your partner's threshold too, giving you a higher limit of £650,000 worth of assets untaxed.
So it's worthwhile using the gift exemptions available while you can.
The first point to keep in mind is the seven-year rule. Gifts of cash or assets will be excluded from IHT calculations as long as they are given at least seven years before your death.
Gifts given between three and seven years before your death are subject to inheritance tax on a sliding scale. This is called taper relief.
There are different annual limits on gifts depending on who the beneficiary is. For example, there is no limit on the value of assets you can gift to a spouse or civil partner.
Additional exemptions allow you to gift some of your estate to friends and relatives. Wedding or civil partnership gifts are outside IHT calculations within certain limits. But gifts must be made on or before the day of the ceremony and if the wedding is cancelled the gift will not be IHT free.
You can make as many small gifts of up to £250 as you like within one tax year. However, you can't give a bigger gift and claim exemption for the first £250.
Also, regular gifts made from taxed income are excluded from calculations as long as you can prove that giving them doesn't affect your quality of life.
Maintenance payments to a spouse or civil partner, or to an ex-spouse or civil partner will also escape IHT. Other exemptions are maintenance payments to dependent elderly relatives and to children under 18 or in full-time education.
In addition you have an annual exemption of up to £3,000 for gifts made in a single tax year. You can carry forward any left over exemption to the next tax year, but no further than that.
Giving your home away is also treated as making a gift, but the rules around it are more complicated. Similarly, transferring assets into a trust can be a tricky matter and IHT may still be due depending on circumstances. When it comes to these matters, it is worth getting a solicitor involved to plan effectively.
Planning to avoid IHT can seem time-consuming, but in the long run it's worth it. Your family will be left without the added strain once you're gone and your assets will be safely out of reach of the taxman.