Tag Archives: Gifting

Inheritance tax

Is Inheritance Tax payable on property gifted during lifetime?

It is a mistake to think that Inheritance Tax (IHT) can be avoided by giving away assets during your lifetime.

While it may often be the case that it is beneficial to pass on gifts during your life, you need to be aware that there could still be an IHT liability.

The tax rules on lifetime gifts

Gifts of cash or valuable items made in the seven years before death may need to be counted when the estate executor calculates IHT liability.

Up to £3,000 can be given tax-free each tax year, or £6,000 if no gift was made the previous year.

Each parent can give their child £5,000 tax-free towards a wedding, and a grandparent can give £2,500 and other relatives £1,000 towards a wedding.

When a gift is given in the seven years before death, it will need to be included in estate calculations for IHT. It is the job of the executor or administrator to find out what gifts have been made and account to HM Revenue & Customs for any IHT that may be due.

Where gifts exceed the amount allowed to be given free of tax, then they will be deducted from the nil-rate band, ie. the amount an individual can leave tax-free on their death. The figure currently stands at £325,000.

There is a sliding scale for calculating the amount of IHT payable on gifts. Where the sum was given less than three years prior to death, then IHT is payable at 40 percent. In the three to four years before death it is 32 percent and the sliding scale continues for each year at rates of 24 percent (four to five years), 16 percent (five to six years) and 8 percent (six to seven years).

Tax-free gifts

Small gifts of £250 or below can be given free of tax, as can gifts made from income you receive and maintenance payments made to relatives or ex-spouses.

Tax-free giving to spouse or civil partner

As your whole estate can be passed free of IHT to your spouse or civil partner, it follows that lifetime gifts to them are also free of tax. However, if you put money into a trust, this may create a tax liability. It is a complex area of law and it is advisable to speak to an expert tax and trusts lawyer.

An experienced adviser will also be able to help you make the most of IHT allowance and suggest ways of structuring your assets to minimise the amount of tax payable. When done properly, this can make a substantial difference to your liability.

It is also possible to appoint a professional executor who would be responsible for calculating IHT liability and preparing estate accounts.

If you would like to speak to one of our expert tax and trusts professionals, ring us on on 01243 216900 or email us at info@legalmatters.co.uk.

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Inheritance Tax rules on lifetime gifts

Giving gifts of cash or valuables before your death means that you can see your loved ones benefit from your generosity. But make sure you understand the Inheritance Tax situation before you give.

Inheritance Tax rules are complex, particularly when it comes to working out what might be due on gifts given before death. Research by Brewin Dolphin found that only 12% of those questioned knew what the annual tax-free gift threshold is.

If money or a valuable item (a lifetime gift) is given within the seven years before someone dies, then there is a possibility that Inheritance Tax will be due if the donor has given away more than the tax threshold amount of £325,000. In that event it would be the recipient of the gift who would be asked to pay the tax.

How much can you give tax-free?

An individual is permitted to give £3,000 per year, with no tax implications. This allowance can be carried over to the following year if it isn’t used, but it cannot be carried over for more than one year.

Amounts above £3,000 are added to the value of the estate if they were given within seven years of the donor’s death. If the total value of the estate exceeds £325,000, Inheritance Tax may be payable.

What is a lifetime gift?

As well as cash, any valuable item constitutes a gift and the value is added to the estate total for the purposes of calculating Inheritance Tax. This includes selling a property at below market value, for example to your children. In that event, the amount of the reduction is added to the value of the estate.

Exemptions

As well as the tax-free £3,000 per year, there are a number of other exemptions allowing you to gift money without needing to consider Inheritance Tax:

  • Any money given to a spouse or civil partner;
  • Single gifts of up to £250;
  • Donations made to registered charities or political parties;
  • £1,000 given as a wedding gift, rising to £2,500 for a grandchild or £5,000 for a child;
  • Money given to an elderly or infirm relative or a child who is under 18 to support them;
  • Gifts from surplus income, for example for birthdays or Christmas, providing it does not affect your standard of living.

The rules can be complicated and it is always worth seeking professional advice before distributing money.

To speak to someone about gifting, call one of our specialist team at legalmatters, on 01243 216900 or email us at info@legalmatters.co.uk.

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The importance of inheritance to the younger generation

Data published by the Office for National Statistics shows that the wealth gap between generations in the UK continues to widen. The findings also show that inheritances are becoming increasingly important to younger people.

Over recent decades, rising levels of household affluence mean that the older generation has higher levels of wealth that can be left to younger family and friends. This wealth is passed on through inheritances, gifts and loans.

The latest Government report looks at how the transferal of assets impacts wealth inequality, social mobility and the intergenerational transference of advantages in the UK.

According to the findings, on average:

  • Individuals with the most income and wealth were likely to receive the most substantial gifts and loans
  • Those aged under 45 were the age group most likely to accept cash gifts or loans from friends and family of the value of £500 or more, and also received the highest amounts
  • Those aged 55 to 64 were the most likely to receive an inheritance and also received the largest legacies
  • The least wealthy and youngest individuals receive smaller estates, but they make up a much more significant proportion of their total net wealth
  • Those in the middle of the wealth distribution were the most likely to receive cash gifts or loans from friends and family of the value of £500 or more.

Gifts and loans

Of 25-to-34-year-olds, 11% had received a gift or loan above £500 in the last two years. This is the age most people become first-time buyers and have children, which could suggest that older family members are keen to help support these expensive life stages. The next highest beneficiaries of gifts or loans is 25-44 year-olds (9%). So, the research could also indicate an ongoing dependence of adult children on their parents in the modern world.

Inheritances

When it comes to receiving an inheritance, the average age a person is likely to inherit is between 55 and 64. This is thought to be because people are living longer.

Inheritances are more likely to be received by those who already have relatively high levels of wealth. However, bequests received by those in the bottom income group were equivalent to 13% of their net wealth, while for those in the top income group inheritances were equivalent to 5% of their net wealth. So, legacies could play some role in reducing inequalities.

Knowing how people save and spend money – and understanding the impact of transfers of wealth between generations – is a crucial step in helping people reach their financial objectives.

To find out how best you can pass on your wealth, speak to one of our expert team by calling 01243 216900 or email us at info@legalmatters.co.uk.

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