As the 2019/20 tax year draws to a close, there are some simple tax planning…
There are many ways in which you can start your Inheritance Tax (IHT) planning now by making gifts that don’t have any IHT implications. Gifts of any assets including cash, to any person, trust or company, will not be fully out of your estate for seven years unless you plan carefully. Depending on the value of the gift and who is receiving it, there may even be IHT levied on the actual gift – so even though the donor is still alive!
Sometimes this seven year rule cannot be avoided, however, there are ways in which it can with careful planning and the right advice, so long as this still complies with the donor’s wishes.
One easy way to reduce your IHT estate over time, is to use the yearly reliefs that are readily available for everyone to use, but you need to stick to the limits and keep your records up to date.
These are summarised here to give you a gist of what can be done, however, all tax planning should be discussed first before implementation to ensure that your wishes are met and that it is suitable for your circumstances. Please note, when gifting physical assets and shares, capital gains tax (CGT) also needs to be considered.
Every individual has an annual exemption of £3,000. This means that you can give £3,000 away in total each year, which does not touch your IHT “clock”. This means that once it is gifted, it is immediately out of your estate. Please note, this is £3,000 per donor not donee.
Gifts to spouses, UK/EEA charities, political parties and registered housing associations
These gifts are exempt for IHT purposes. There are special rules for what constitutes a political party or a registered housing association and also special rules for non-domiciled spouses. All of these would need to be advised upon.
Gifts made for marriage
There is an exemption for gifts made in consideration of marriage. The amount of the exemption depends on the relationship the donor has with the donee and only one gift per marriage is allowable i.e you could not make the maximum donation to the bride and the maximum donation the groom, but you can make the maximum donation to one of them and also make the maximum donation to the bride or groom of a separate wedding.
Up to £250 per year to any number of recipients is exempt. Therefore, if a grandparent gave their 10 grandchildren £100 for their birthdays each year and £150 for their Christmas presents, this will be exempt for IHT purposes and won’t appear on the grandparent’s IHT clock.
Regular gifts made out of income
A gift is exempt if it forms part of the normal expenditure out of the donor’s income, regardless of the amount or value of the gift. The gifts need to be regular and habitual, made out of income and not capital and can not leave the donor unable to sustain their usual standard of living.
Maintenance of family
Any lifetime gift whose purpose is to provide for the maintenance of a spouse, a civil partner, a former spouse, a former civil partner or a “dependent relative” are not regarded as transfers of value for IHT purposes. Gifts for the maintenance of children (including step-children, adopted children, etc) of the donor or their spouse or civil partner are only not transfers of value provided the child is under 18 or undergoing full-time education.
Waiver of remuneration or dividends
A remuneration waiver occurs when an employee or director gives up their rights to receive salary, for nothing in return. This is ignored for IHT purposes and may be useful to keep an estate down if the income is not needed whilst keeping money in the company. If an individual decides to waive their rights to receive a dividend, this is also ignored for IHT purposes. Care must be taken though as a number of procedures must be followed correctly, to avoid the distribution being challenged by HMRC, leaving the individual becoming unstuck and end up paying income tax regardless of whether they receive the cash or not.
With all of these items, there are certain provisions and nuances to follow plus certain other rules will need to be taken into account before any gift/transfer is made, such as related property rules, gifts with reservation of benefit and domicile. There are also gifts that can be made of Agricultural Property, Woodlands or qualifying Business Property that can be done with limited impact on IHT and the estate.
If you would like to talk through any of these gift possibilities or any other IHT/estate planning issues, please give us a call on 01730 231054 or email firstname.lastname@example.org.