As the old saying goes, it is better to give than to receive.
But did you know that when you give your loved ones a gift you can also benefit as well as the person you’re giving to?
It may come as a surprise, but when you make gifts as part of your overall inheritance tax planning, you can have the pleasure of giving, bring joy to your loved ones through your generosity, and even reduce your inheritance tax liability at the same time.
However, in order to avoid potential pitfalls, you’ll want to understand the rules first.
1. Know what is defined as a gift
What counts as a gift for inheritance tax purposes?
Simply put, it can be anything that’s part of your estate. Property, cars, cash, investments, jewellery – even collections of stamps, wine, coins or sports memorabilia can be liable to inheritance tax.
One thing to remember is that normally you can’t add conditions to your gifts. For example, if the gift is a car, you can’t continue to drive it. If the gift is a home, you can’t continue to live in it rent-free otherwise inheritance tax may apply.
2. Begin giving early
As soon as you give a gift, an inheritance tax clock starts ticking.
Usually, seven years must pass before your gift is 100% inheritance tax-free.
If you die before this time lapses, the person you’ve given the gift to may owe inheritance tax.
It’s one reason for giving gifts early. When you’re younger you’re more likely to live seven years from the time the gift was given. Making gifts earlier also increases your chance of getting to experience the pleasure that comes from seeing those you love enjoy what you’ve given – and to thank you for it.
3. Use annual gift exemptions
Each of us has an annual allowance that permits gifts at or below £3,000, free of inheritance tax in any tax year.
If this full amount isn’t taken one year, it carries over into the next year. This means that if you don’t give the full amount one year, you can give £6,000 the following year. This allowance can only be carried over for one year, however.
Everyone can also give as many gifts as they like below a value of £250.
These gifts are currently inheritance tax-exempt – there’s no seven-year clock ticking.
It’s important to note that you cannot combine this small gift allowance and your annual allowance for any individual. This means that you couldn’t give someone a £3,000 gift and then another £250 small gift.
Donations to charities, including gifts to political parties, can also reduce inheritance tax.
4. There are special rules for weddings
Weddings are gift-giving occasions.
But before handing over a gift to the happy new couple, consider inheritance tax.
You may not be aware, but a wedding gift offers a chance to reduce inheritance tax.
The amount that you can give inheritance tax-free depends on your relationship to the couple and the timing and amount of your gift. Generally, the more closely you’re related to the couple, the more you can give.
So if one of your children marries, you can give up to £5,000.
If a grandchild or great-grandchild marries, this reduces to £2,500 or less.
And if you’re giving to a relative or friend this drops to £1,000.
But don’t wait until after the honeymoon to give your gift.
It must be given before, not after the wedding to avoid attracting inheritance tax.
5. Gifts from income
You can make regular payments to help with another person’s living costs. There’s no limit to how much you can give tax-free, as long as:
- you can afford the payments after meeting your usual living costs
- you pay from your regular monthly income
These are known as “normal expenditure out of income”. They include:
- paying rent for your child
- paying into a savings account for a child under 18
- giving financial support to an elderly relative
6. Document, document, document
It’s very important that you track the details of any gifts that you’ve made to reduce inheritance tax. You’ll need to record whom each gift was given to, the gift they were given, the date the gift was given, and the value of the gift.
It’s also helpful to keep evidence of the gift, for example, you can use a bank statement to evidence a gift of money. This will make it easier to establish if there is any inheritance tax due on your gifts when you die.
💡 For more tips and ideas on how to reduce taxes, invest wisely, and understand your retirement options, sign up for my weekly Expat Digest.