My wife and I want to give our two daughters money now to avoid inheritance tax (IHT). We know at least one of us has to live for another seven years, but do we have to do anything legally to do this or can we just give them the money?
There are a number of things you should consider before making such a gift.
First, do you actually have an IHT liability now that you are hoping to reduce? Remember that each of you has a nil-rate band of £325,000, on which no inheritance tax is paid. If you own a house, you also have the residence nil-rate band which is due to go up to the full £175,000 in April this year – effectively giving you a total £500,000 each that can be passed on tax-free.
Any nil-rate band not used by the first to die can be passed on to the surviving spouse. If none had been used, this would mean a total of
£1 million can be passed tax-free to your daughters when the second spouse dies.
Next, do you have any assets such as pension funds that would be passed to your daughters outside your estate, and therefore not subject to IHT?
If you still wish to proceed with the gift, you should draw up a brief letter addressed to each daughter stating that you are making this gift of £XX and the date of the gift. If you have not used your annual gift allowance of £3,000 you could include a note, saying: “The first £3,000 is using my annual gift allowance for the 2019/20 tax year.”
A copy of this letter would then be left with your will, so your executors have a complete record when they are preparing the probate application.
Francis Klonowski is director of Klonowski & Co
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