Wills and Probate solicitor Sian Lias offers a timely reminder about minimising inheritance tax with lifetime gifts:

With the end of the current tax year fast approaching, anyone wishing to make use of their 2020/2021 and 2019/2020 annual allowance in relation to gifts hasn’t long to use both.

Each tax year you can give away up to £3,000 under the current annual allowance rules for gifting. If you do not make a gift of £3,000 in one tax year, then the following tax year you can bring forward the previous year’s unused allowance. If you have not used the previous tax year’s allowance, then you have the potential to bring this forward, meaning that you could benefit from gifting £6,000 tax free before 5 April 2021.

However, the current tax year’s exemption is used before bringing forward the previous year’s unused allowance. As such, if you failed to utilise your 2019/2020 allowance this will be lost once the new tax year begins.

If you wish to reduce your estate by a more considerable amount, you are able to gift larger amounts over and above the annual allowance. On the whole, providing you survive seven years from making the gift, it would fall outside of your estate for Inheritance Tax purposes and thus reduce your estate.

For a gift to be classed as a gift and fall out of your estate, it needs to mean just that. You need to make the gift outright to a third party meaning you will no longer have any benefit from it.

It is beneficial to document and record any gifts made and for this to be stored with your Will or somewhere those dealing with your estate (i.e. your Executors under your Will) will be able to access. By careful record keeping during your lifetime, your Executors will be able to collate the information needed at the time of your death in both a time and cost-efficient manner.

Under current Inheritance Tax rules, each person has a Nil Rate Band allowance of £325,000 and the general rule is that assets above that value are taxed at 40% on your death.

There are other allowances and exemptions that may be applicable depending on the assets held at the date of your death and the beneficiaries named under your Will. For example, any gifts made to your spouse or to charities are exempt from Inheritance Tax. Furthermore if you were leaving more than 10% of your estate to charity on your death, the Inheritance Tax rate on the remaining assets over and above the Nil Rate Band is lowered to 36%.

If you have an interest in a property that you have resided in that is being left to your children or their descendants, then your estate may also benefit from the Residence Nil Rate Band. However, there are certain conditions that must be met in order for your estate to benefit from the Residence Nil Rate Band. It is important to check that your Will is up to date to ensure it not only records with your wishes but that you are also utilising the allowances available to you.

Whether there will soon be any changes to the annual allowances for gifting, or to Inheritance Tax rates themselves, remains to be seen, as there is always speculation and uncertainty around this time of year with the pending Budget announcements from the Chancellor due at the beginning of March.

If you would like a review of your current Will, or to discuss estate planning and how to best achieve the most out of succession planning and passing on your assets to your loved ones, Sian and her colleagues in the Wills and Probate team will be more than happy to discuss your requirements and provide advice. We can work alongside your financial advisers, accountants and wealth planners to determine the best package for you as a whole.

Please note we are not able to provide financial advice but can recommend you to a selection of financial advisers whom we work closely with if you are in need of financial advice.

If you would like more information about making a lifetime gift or would like to discuss any other estate planning matters, please contact me by calling 01256 854630 or by emailing [email protected]

Alternatively, click here to go to our contact page.

Disclaimer

This article is current at the date of publication set out above and is for reference purposes only. It does not constitute legal advice and should not be relied on as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.