A recent study found that just 45 per cent of people who are gifting assets or large sums of money understand inheritance tax (IHT) rules.
The research was conducted by HM Revenue & Customs (HMRC) as they attempt to ascertain the public’s understanding of IHT and information on their gifting behaviour.
We have put together our top tips for minimising inheritance tax to ensure you make the most of your gift to your beneficiaries.
Prepare a Will
If you are married or in a civil partnership and do not have a Will, the whole of your estate may not pass to the surviving spouse or civil partner. As there is no inheritance tax on gifts between spouses or civil partners and any unused inheritance tax allowance which is not used upon the first death can be transferred for use on the death of the survivor, making a Will leaving your estate to the surviving spouse or civil partner can save inheritance tax.
If you do not have children but wish to leave your home to stepchildren, you may qualify for the residence nil rate band which is currently worth £150,000 in addition to the main inheritance tax allowance. Stepchildren would not benefit from your estate if you do not have a Will.
Make Lifetime Gifts within the Tax Allowances
There are different tax-free allowances for making gifts.
These include the annual allowance of £3,000 to which it is possible to add any unused allowance from the previous tax year. As the allowance can only be rolled over for one tax year, the maximum that could be given without any potential inheritance tax implications is £6,000.
There are other exemptions such as marriage gifts (up to £5,000 for children, £2,500 for grandchildren and £1,000 for anyone else), small gifts of up to £250 per year to any number of people who haven’t received a gift on marriage or of any part of the annual allowance.
It is also possible to make regular gifts of any amount from surplus post-tax income provided that they leave you with enough income to maintain your standard of living which would not subsequently be treated as part of your estate for inheritance tax purposes.
Make Lifetime Gifts of Larger Amounts
In most cases, there is no inheritance tax to be paid when making gifts in excess of the allowances provided you survive seven years from making the gift. If you were to die within seven years of making the gift there would be no more inheritance tax to pay than if the recipient had received the gift on your death. If you were to die within seven years and the gift exceeds the inheritance tax allowance which is currently £325,000, there may be tapering relief available.
Make Gifts to Charities
There is no inheritance tax to pay on gifts made during your lifetime or after your death to UK registered charities, community amateur sports clubs or political parties.