Chris England, Private Client Executive at Neves, talks about how lifetime gifting could help you reduce inheritance tax…
With the season of gift giving behind us, you may be forgiven for thinking the associated obligatory stress of picking out the perfect present for that distant relative was behind you for another 12 months.
But if you are one of the many who continually defer getting your affairs in order, the turn of the New Year offers a good opportunity to take action, and the role of gifting can have an important role to play.
Wills are often the primary consideration in the context of succession planning and rightfully so; the importance of a well-thought out, competently drafted Will cannot be overstated.
However, if you are one of the “lucky” ones whose estate may attract a liability to inheritance tax (IHT) on death, as a tax planning tool, a Will has its limitations.
It is therefore necessary for those looking to mitigate IHT to take action sooner rather than later, and consider the use of lifetime gifting as part of the wider estate planning process.
How can lifetime gifting help?
By decreasing the size of your estate during your lifetime, it is possible to reduce IHT payable on death. There are various types of gifts that can be made which are classed as “exempt gifts” and once made, the value is outside of your estate for IHT purposes.
There is no limit as to how much a person may gift away during their lifetime to other individuals and even if the gift does not classify as an exempt gift, provided the gift is survived by seven years, it will have no effect on your estate’s IHT liability upon death.
Are there any risks?
The rules surrounding lifetime gifting and IHT are complex and require consideration and planning. If a gift is not survived by seven years, the value of that gift can fall back into your estate on death for IHT purposes.
It is also important to consider your own financial needs and whether you can afford to make the gift without negatively impacting on your own standard of living.
The loss of control of an asset can create issues which is when the use of an appropriate trust structure might prove useful.
Particular care should be taken when a gift is contemplated and the donor is intending to retain a benefit as this could fall foul of HMRC’s “gift with reservation of benefit” rules.
It is also necessary to consider the potential capital gains tax implications of any intended gift.
If you feel that you would benefit from IHT planning advice, our Private Client team are always on hand to help and would welcome your enquiry.
Call 01908 304560 or email firstname.lastname@example.org