If your estate is worth more than the Inheritance Tax free allowances available to you, what lifetime tax planning steps can you take to reduce or avoid a tax bill?
We have considered some of the lifetime tax planning steps you could implement with the principal idea being to reduce the value of your estate for Inheritance Tax purposes. This can be done by making absolute gifts or by setting up a Trust (or Trusts) during your lifetime.
Lifetime tax planning
Absolute gifts and Trusts
Your estate is valued for Inheritance Tax purposes by adding together the value of the assets you own at your death with the value of the gifts you have made and the Trusts you have set up during the last 7 years of your life.
There is no Inheritance Tax immediately payable when you make absolute gifts during your lifetime whatever the value. These gifts are known as “potentially exempt transfers”.
Generally speaking, if you survive the making of a gift by 7 years then usually the value of the assets you have given away will not be subject to Inheritance Tax on your death.
If, however, you were to die within 7 years of making a gift, the value of the gifted assets will be added to the value of the assets you own at your death to calculate the amount of any Inheritance Tax due.
Exemptions
There are, however, certain gifts you can make that would not be subject to Inheritance Tax even if you were to die within 7 years of making them:-
- You can give away up to a total of £3,000 each tax year. If you did not make any gifts during the last tax year, this exemption can be carried forward for one year only.
- In addition, you can make gifts of up to £250 per recipient each tax year but these cannot be made to the same people who receive the £3,000 sum specified above.
- Wedding gifts of up to £5,000 in respect of your children, £2,500 in respect of your grandchildren and £1,000 in respect of anyone else getting married will be exempt. The gifts must be made on or shortly before the marriage.
- Gifts out of your income can also be exempt, if these are made on a regular basis and are made out of your surplus income rather than capital. This can be a valuable exemption as there is no limit on the gifts being made, so long as you are not having to resort to your capital to fund the gift or your living expenses.
- Gifts of assets qualifying for Agricultural Property Relief or Business Property Relief will either be exempt or reduced in value for Inheritance Tax purposes.
- Gifts to your spouse and charities are also exempt.
Please note that there is no reduction in the rate of Inheritance Tax charged on lifetime gifts if you survive them by less than 7 years, unless the amount you have given away during the last 7 years of your life exceeds the total tax free allowances available to you on your death. If you have given away more than these tax free allowances during the last 7 years of your life, then the amount of tax payable will be reduced by 20% for each year more than 3 years you survived the gift.
You should bear in mind that giving away assets other than cash may result in a charge to Capital Gains Tax. Also, if you give away an asset but continue to enjoy a benefit from it, the asset may well remain in your estate for Inheritance Tax purposes under the “reservation of benefit” rules.
If you would like to make gifts during your lifetime but do not want these gifts to be received or enjoyed by the recipients immediately, you could consider setting up a Trust and transferring money or assets into this. There may be tax consequences when you set-up and run a Trust which should be considered before you put such arrangements in place.
How can Nelsons help?
Jane Sutherland
is a Partner in our Wills, Trusts and Probate team.
At Nelsons, we can offer expert advice and help you plan as best you can for the future. We can tailor our advice to meet the needs of your individual circumstances.
If you would like further advice in relation to lifetime tax planning or any other related subject, please contact Jane or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.