Reduce Your Inheritance Tax liability by getting the right advice.
Although this article is titled “How to avoid inheritance tax” this is merely for marketing purposes and actual terminology is should be “How can you mitigate your Inheritance Tax liability (IHT)”, as strictly speaking trying to avoid tax is not legal, but trying to reduce your liability is perfectly within the Law, and is something we can certainly advise on and someone you could undoubtedly benefit from.
In the article below we provide practical solutions on the simple and effective ways to reduce your potential inheritance tax liability.
As unbelievable as it may seem you cannot give away property (footnote 1) to someone else and remove yourself from inheritance tax liability without adhering to a set of rules. Today I will comment on the ‘exempt’ transfers rather than the ‘potentially exempt’ transfer rules i.e. the certainties.
The main point of this article is to demonstrate how ‘gifting / transferring property’, as a concept, can reduce the overall value of your estate for inheritance tax purposes.
When people think of gifts for inheritance tax planning they normally automatically think of ‘gifts to family and tax’ but the reality is the beneficiary does not have to be a member of your family as you will discover as you read on.
When is a ‘gift’ a ‘gift for tax purposes?’
For tax purposes a ‘gift’ or ‘part gift’ must be just that, there cannot be a commercial transaction involved where consideration is received.
Once the property is gifted then the donor (footnote 2) can no longer receive any gratuitous benefit. For example, saying you are giving the residential home to a sibling and then continuing to live there. As another example that would not constitute a gift, would be giving away £15,000 as a deposit for your son to buy a car on the basis the donor will get the money back when the car is eventually sold.
Transfers between spouses and civil partners
In the case of marriage, transfers between spouses or civil partners, during life and death are exempt provided the donor and beneficiary are domiciled in the UK.
Annual IHT exemption can be used to reduce your IHT exposure
The donor can make a lifetime gift exempt from IHT up to a total of £3,000 in any one tax year. If the whole of the £3,000 is not used in any tax year, the balance can be carried forward to the next year.
For example, if Jayne transfers £1,500 in year one, she can therefore carry forward £1,500 and have a £4,500 exemption in year two.
Any unused balance is lost if it is not used in the next year i.e. if cannot be carried forward to year three.
Small Gifts to reduce your IHT bill
Any number of gifts up to £250 to different persons may be given in one tax year and are exempt from inheritance tax.
The gift has to be outright and cannot be a gift into a trust.
Importantly, it cannot be used as part of a larger gift. For example, if a person made a gift of £3,250 using the £3,000 annual exemption, the £250 exemption could not cover the excess amount over the £3,000.
Normal expenditure can significantly reduce your inheritance liability
This can potentially be the most valuable way of legitimately mitigating inheritance tax.
The IHT rules state the following:
• The lifetime transfer must have been made as part of the donor’s normal expenditure and
• It was made out of income; and
• After allowing for all transfers forming part of normal expenditure, the donor is left with sufficient income to maintain their usual standard of living
To clarify ‘normal expenditure’ has to be habitual or regular to count. The amount does not have to be a fixed amount to qualify as normal expenditure by must have some rationale / pattern to it. For example, a monthly amount based on the surplus to your requirements.
Gifts on marriage or civil partnership for IHT purposes
There are 4 ways gifts limits that apply in respect of a gift in consideration of marriage to those entering into a marriage or civil partnership:
• £5,000, if the donor is a parent of a party to the marriage
• £2,500, if the donor is a remote ancestor, e.g. grandparent, of a party to the marriage
• £2,500, if the donor is to be the bride or groom, and the gift is made to the other prospective spouse
• £1,000, if the donor is any other person
Gifts to children for their education and maintenance can reduce your IHT bill
There are certain payments for a child’s maintenance, education or training that are exempt from inheritance tax:
• The exemption only lasts until the tax year when the child becomes 18 years old, or ends full-time education, whichever is the later.
• Illegitimate, adopted and step-children are included (not grandchildren).
• A transfer for a dependent relative of the donor is exempt, if it constitutes reasonable provision for the relative’s care and maintenance.
Gifts for national benefit are outside of IHT
Certain gifts for the benefit of national interest and benefit are exempt. For example, gifts to museums, libraries, universities and the National Trust.
Also gifts of land to housing associations.
Gifts to charities and political parties are exempt from IHT
Gifts to UK charities and major national political parties are totally exempt.
The Government also offers a reduced IHT rate 36% (rather than 40%) where at least 10% of the net estate is left to charity. For clarity a person’s net estate is that which remains after deducting exemptions, reliefs and the nil rate band.
IHT Help for Heroes
The estates of members of the armed forces are free from inheritance tax should they die because of wounds received or diseases contracted whilst on active service.
To conclude, if you’re one of the thousands of people every month who search on google for answers on ‘How best to avoid inheritance tax’ fair play to you. However, a word of caution: please do not try and implement any strategy until you have sort professional help as inheritance tax mitigation is a highly complex subject and you easily and unwittingly fall foul of the law. Also the economy and law is dynamic and web information can become obsolete or tired very quickly.
Niche Advice are Independent Financial Advisers, and If you think you would benefit from current inheritance tax advice or planning, please reply to this email or complete the contact form on our website www.nicheadvice.co.uk
1: I will refer to ‘property’ throughout this article and to clarify I mean the collective of all possessions and assets and not just bricks and mortar.
2. I also will use the term ‘donor’ which means the person making the gift.
Author: Richard Stokes
Richard Stokes is a partner at Niche Advice who are whole of the market Independent Finance Brokers In London. His role is very much focused on on Mortgage and Insurance products.