Passing on wealth to your children may have been on your mind for some time. Well at this time of year when you may be feeling particularly festive, not only can you become more impressive than Santa (in your children’s eyes), you can also avoid that nasty Grinch (the Government and their Inheritance Tax).

Gifting money to your children now has two major benefits:

  1. You get to see your children enjoy the money you give them.
  2. Planning now can avoid Inheritance Tax (IHT) having to be paid in the future on your death.

Here’s a little reminder of the two major allowances for Inheritance Tax.

But more can be done.

The rules of gifting (to avoid IHT)

You can actually gift whatever amount you want. There are actually no restrictions on the amount of money you can gift to anyone. You just need to live 7 years from making the gift to ensure it falls outside your estate for IHT.

There are however certain allowances that can be utilised to avoid IHT and not having to wait 7 years.

Here are the rules of gifting (to avoid IHT).

#1 – Gifts to spouses and charities are completely IHT free

  • This does not include partners that live with you.
  • You must be married or in a Civil Partnership.

#2 – Wedding gifts can be IHT free

  • Up to £5,000 can be given to a child, up to £2,500 for a grandchild and great grandchild, and up to £1,000 for any other friend or relative.
  • The gift must be made before the wedding and the wedding has to actually go through!

#3 – Smaller gifts

  • You can give as many people as you want £250 IHT free each year.

#4 – Annual gift exemption

  • You are able to gift up to £3,000 each year.
  • But you can’t use the £250 gift mentioned in point 3 and the whole £3,000 to the same person.
  • If you didn’t use your gift exemption last tax year you can carry this forward and give £6,000 this year.

#5 – Gifts out of surplus income

  • If you have a guaranteed income in retirement that covers all your spending and you end up with a surplus of income,  you can gift this surplus.
  • You must commit to continuing the gift for the long term and must be able to prove that you don’t need the extra income.

It’s vital to keep records of gifting (to avoid IHT)

Keeping records of all your gifts you ever make is key.

The IHT 400 tax return form is a complicated document to complete and if you don’t have the evidence of when gifts were made it is likely that HM Revenue and Customs will charge you IHT and undo all the good planning you may have done.

If you would like to discuss how you can spread some Christmas joy and set up a gifting strategy then please get in touch as we would be delighted to help.

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.