Passing on your estate: Are you missing a trick when it comes to inheritance?

By November 13, 2023Client Zone, News

By Tim Collyer, Chartered Financial Planner at Montgomery Charles

No-one likes to dwell on it, but there will eventually come a time when your loved ones will inherit your possessions. Given the hard work you’ve put in to accumulating your wealth, your home, and everything else, you’ll also want to ensure that as little of that goes into the pockets of the taxman as possible.

What you may not realise is that while plenty of options are open to you, it’s crucial to plan ahead as much as you can. In some cases, you can avoid Inheritance Tax (IHT) if you gift your assets to others a number of years before you pass away. In other cases, there are financial levers you can pull over time to safeguard your wealth.

So how can you pass on possessions – or gifts as they are properly known – in the most efficient way?

At Montgomery Charles, we provide holistic financial services. That means that we use our exceptional understanding of the financial landscape to give you the very best guidance on how to manage your estate. Gifts are just one of the areas we advise on as part of creating your lifelong financial plan.

To give you an idea of how this might work, let’s take a closer look at what IHT actually does.

In essence, IHT is a tax that is levied on the value of your estate above a certain threshold. This is currently £325,000 for individuals and £650,000 for married couples or civil partners. The rate of IHT is 40% on the excess value, which can significantly reduce the amount of wealth that you can pass on to your loved ones. For every £1 that you pass on beyond those thresholds, 40 pence is potentially lost in tax.

What are gifts, and how can they help?

Gifts are transfers of money or property that you make to others, without receiving anything in return, or for less than their full market value.

Gifts can be exempt from IHT if they meet certain conditions, such as:

Potentially exempt transfers (PETs): You can give away any amount of money or property to anyone, as long as you survive for seven years after making the gift. If you die within seven years, a portion of the gift will be added back to your estate and subject to IHT. The size of the portion depends on when you die – if it’s within a year of making the gift, a higher proportion will be subject to IHT than if it’s within five or six years. Regardless, it’s not hard to imagine how prudent forward planning could make an enormous difference in this kind of scenario.

Annual exemption: You can give away up to £3,000 per year without any IHT implications. This can be carried forward for one year if unused, so you can give away up to £6,000 in one year if you did not use the exemption in the previous year.

Small gifts: You can give away up to £250 per person per year without any IHT implications, as long as you have not used another exemption for the same person.

Wedding gifts: You can give away up to £5,000 to your child, £2,500 to your grandchild or great-grandchild, or £1,000 to anyone else on their wedding day or within three months before or after it, without any IHT implications.

Normal expenditure out of income: You can give away any amount of money from your income, as long as it does not affect your standard of living and it is part of your normal expenditure pattern. For example, you can pay for your grandchildren’s school fees or make regular donations to charity.

By using these exemptions, you can reduce the value of your estate and therefore the amount of IHT that will be due on it.

However, there are some rules and risks that you need to be aware of when making gifts. Some are obvious: once you gift something, you can’t get it back, or control where the value goes. Some are less obvious: for example, if you give away an asset that has increased in value since you acquired it, you might have to pay Capital Gains Tax on the gain you’ve made. (A variety of exceptions can apply, but it can be a complex world to navigate without specialist advice.)

As you can see, making gifts can be a useful way to save IHT, but it also involves some complexities and trade-offs. Therefore, it is advisable to seek professional advice before making any significant gifts, to ensure that you understand the implications and consequences of your actions. If you would like to discuss your options and plan your estate in the most tax-efficient way, please contact us today for a free consultation.

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Article correct as of November 2023.