Autumn Statement – Gifting and Inheritance Tax (IHT) Considerations
There were no new changes to IHT in the autumn statement, other than the £325,000 nil rate band and up to £175,000 residence nil rate band remaining frozen until 2028.
With a Government that may need to raise additional funds in the next few years here is a timely reminder of the key exemptions that are currently available which you may like to take advantage of.
24th November 2022
Nicola Allen See profile
Annual Gifts exemption
One of the main allowances available is the £3,000 annual exemption. This is the total amount that you can gift without the value being added to your estate. If you do not utilise this allowance it can be carried forward a year.
As a couple, that means you will usually be able to give away £6,000 and potentially £12,000 if you have not made a gift the year before.
Small gifts allowance
The small gifts allowance allows you to make as many gifts of up to £250 per person as you want, although it cannot include someone you have used another exemption on.
Gifts out of normal expenditure
A flexible way to make regular gifts out of normal income. These gifts are immediately out of your estate as long as you are able to maintain your standard of living without having to draw on additional capital. This is particularly useful if you have surplus income and can facilitate sizeable gifts over time that are immediately free of IHT. Your financial planner will be able to advise you on the level of regular gifts you are be able to make that should be eligible under this exemption.
It is worth bearing in mind that your executors will need to prove to HMRC that these gifts fulfil their criteria, so it is worth keeping a record of your available income/ cash flow each year.
Gifts in respect of marriage
If congratulations are in order, you are able to make wedding or civil ceremony gifts of between £1,000 and £5,000 depending on your relationship to the bride or groom.
A gift would need to be made before the wedding and the wedding does need to go ahead!
Larger gifts and Trusts
Larger gifts can be particularly beneficial from a tax point of view later in your life when the seven-year rule may become an issue. The seven years is the period of time you would need to survive in order for the gift to fall out of your estate and therefore not be liable to IHT. For larger gifts, which exceed the available nil rate band, it is possible for the resulting tax charge to be reduced by something called taper relief. This reduces the rate of tax payable on the gift on a sliding scale provided you survive at least three years.
In the case of larger gifts, if you are concerned with giving the funds outright, a Trust can be used. This can both protect the funds and also be used to hold funds until you are happy to distribute them at a later date. In the meantime, the seven years commences from the time that funds were placed in the Trust and not from when the funds were distributed.
There are a number of ways to structure gifts to both take account of tax and family considerations. If the money is needed before age 18, a trust structure is a tax efficient way to give money, while still giving you some control of how it is used.
Gifts in your Will
By leaving part of your estate in your Will to a charity (or a number of charities), it’s possible to reduce the rate of Inheritance Tax payable from 40% to 36%. This can be an effective way to reduce the tax liability, whilst also ensuring that your chosen charities benefit from generous donations.
There are several factors that will need to be considered if you are hoping to obtain this tax relief. For example, is the estate subject to Inheritance Tax in the first place and if so, what is the size of the chargeable estate and the proportion of this that is being left to charity?
This can create a good opportunity to make sure you are happy your Will is up to date and that everyone will benefit from your estate as you wish.
Sue’s net estate is valued at £1,000,000, after her nil rate band and relevant liabilities and exemptions. She has included a charitable gift of £70,000 to a charity in her Will. The inheritance tax liability is therefore £1,000,000 – £70,000 x 40% = £372,000.
If Sue had instead left £100,000 (therefore 10%) to the charity, the IHT rate would be reduced to 36%. The IHT liability would then be £1,000,000 – £100,000 x 36% = £324,000, the charity would have benefited from an additional £30,000 and the estate would be £18,000 better off.
This is a rather simplified example but does give you a good idea of how this relief can be beneficial to all concerned.