In our last piece we looked at Kickstarting your Estate Planning by getting to know what your current position is. Once you know this you can start to work on taking steps towards that based on what is important to you.
You may have plans in retirement to simply enjoy your wealth, you may not be concerned about the inheritance tax bill or you might want to pass as much of the estate you have created to your loved ones as possible or a combination. Whichever it is, the plan is yours, and your adviser aims to help you join the dots from where you are to where you would like to be.
There are several possible options when considering Estate Planning and these often work in conjunction with each other, but today we will look at two of the easier ones, Spending and Gifting.
Spending has the effect of reducing your estate so you can achieve enjoying your wealth and potentially reducing any inheritance tax bill. The downside here is that any assets you buy are added back into your estate value. Another risk may be spending too much and not leaving enough for future changes, for example care needs.
Gifting is another possible option which passes your wealth to someone else and can be monies or possessions. The downside here is you no longer have control of it should you need it and you are unable to benefit from it once gifted – so if you give away a property you cannot then also live in it. If the gift is above the given annual allowances it can come back into your estate if you pass away soon after gifting.
So, what can you gift that is immediately exempt for Inheritance Tax (IHT) purposes?
You can give away £3,000 worth of gifts each tax year and you can carry any unused annual exemption forward to the next year - but only for one year.
You can also give away for specific purposes the following:
Wedding or civil ceremony gifts of up to £5,000 for one of your children, £2,500 for your grandchild or £1,000 for another person.
Normal gifts out of your income (that leaves you with sufficient income for your usual outgoings) for example Birthday or Christmas presents.
Payments to support another person’s cost of living e.g., a dependent child under 18 or an elderly relative.
Gifts to charities.
Gifts to political parties.
You can use more than one of these exemptions on the same person - for example, you could give your grandchildren gifts for their Birthday, Christmas and wedding in the same tax year.
You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption (one of the above) on the same person.
Potentially Exempt Gifts:
Then there are gifts that may be outside your estate in the future, but not immediately. These are call Potentially Exempt Transfers (PET’s) and their tax position falls into the 7-year rule.
If there’s Inheritance Tax to pay, it is charged at the rate of 40% on gifts given in the 3 years before you die. Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’ at a reducing rate outlined below.
Years between gift and death – Tax Paid
Less than 3 – 40%
3 to 4 – 32%
4 to 5 – 24%
5 to 6 – 16%
6 to 7 – 8%
7 or more – 0%
If your estate had a value of £1.5m and you gifted £500,000 to your children today, this could still potentially be taxed for inheritance tax purposes if you pass away in any of the next seven years. The usual tax rate applies for the next 3 years but gradually reduces each year until the 7th year when that gift is no longer counted toward the value of your estate.
Keeping a record of your Gifting can make managing your estate after you have passed away much easier for your family and executors and we have created a template Gift Record for you to use. If you would like a copy, please e-mail email@example.com.
If you would like to work with a Financial Planner to create your Estate Plan, please contact one of the team at Ethos Financial Solutions on 01302 244977.
NOTE: The Financial Conduct Authority does not regulate some forms of Estate Planning.
Publish date: 29th April 2021