The saying goes, it’s better to give than to receive. However, did you know that when giving your loved ones a gift you can also benefit along with the person you’re giving to?
It might not be known to you, but when you make gifts as part of your final inheritance tax planning, not only will you receive the joy of giving your loved ones a gift, you can even reduce your inheritance tax liability.
It’s important to understand the rules first to avoid potential disappointment. The following information is based on taxation law and practice within the UK, subject to change. Regarding the amount of tax you pay depends on your personal circumstances which can also change in the future.
1. Understand what’s defined as a gift
This could be property, money, cars, investments, and jewellery – even collections of stamps, coins, etc. Pretty much anything can be classed as a gift for inheritance tax purposes. It’s important to remember that usually, you can’t add conditions to your gifts. For example, if the gift is a house, you can’t continue to live in it rent-free otherwise inheritance tax may apply. Similarly, if the gift is a car, you can’t continue to drive it.
2. Begin giving early
Once you give someone a gift, an inheritance tax clock will start. In most circumstances, you usually have to wait seven years before your gift is 100% inheritance tax-free. Also, if you die within those seven years the person you have given a gift to may owe inheritance tax. Giving someone a gift earlier increases your chance of being able to see the pleasure of them experiencing this – and to thank you for it.
3. Use annual gift exemptions
We all have an annual allowance, which permits gifts at or below £3,000, free of inheritance tax in any tax year. If the full amount is not used within one year, it moves over into the next year. Therefore, if you don’t give the full amount during one year, it would then double to £6,000 next year. However, this allowance can only be carried over for one year, it is not something you can continuously mount up over years.
Also, everybody can give as many gifts as they like as long as it’s below the value of £250. The good thing about these gifts is they are exempt from inheritance tax meaning there is no seven-year clock ticking. Furthermore, it is important to remember that you can’t combine this small gift allowance and your annual allowance for any individual. For example, you wouldn’t be able to give someone a £3,000 gift and then a £250 small gift. So think carefully about who you are going to give which gift to. Charity donations, including gifts to political parties, can also reduce inheritance tax.
4. What are the rules regarding weddings?
It is widely known that weddings are gift-giving occasions. However, before handing over a gift to the happy new couple, it’s important to consider inheritance tax. You might not be aware, but wedding gifts offer the chance to reduce inheritance tax. However, obtaining inheritance tax-free depends on the relationship to the couple, the timing, and the amount of your gift.
Normally, the closer you’re related to the couple, the more you can give. For example, if one of your children gets married, you can give up to £5,000. If a grandchild or great-grandchild marries, this will then reduce to £2,500 or less. If you’re giving to a relative or friend this reduces to £1,000. You must not wait until after the honeymoon to give the couple your gift. It must be given before and not after the wedding to avoid attracting inheritance tax.
5. Document your gifts
When giving out gifts it’s imperative that you keep track of the details in which 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 and value of the gift.
It would also be beneficial to keep hold of any evidence of the gift, i.e. you can use a bank statement as evidence of a gift of money. This will make it easier to establish if there is any inheritance tax due regarding your gifts when you die.
How can Nelsons help?
Making sure you’re giving gifts correctly can be complicated. If you would like to discuss any of the points raised in this article, please do not hesitate to contact Zoe or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.Contact us