Recently, more and more individuals are deciding to freeze the size and extent of their estate by making significant lifetime gifts, however, many are worried about the potential tax consequences of doing so. In this guide, we’re going to be looking at why one child may pay more than another in inheritance tax and how you can guarantee parity with effective estate planning.
What is Lifetime Gifting?
Lifetime gifting is when cash or assets are given away during a person’s lifetime. This removes value from the individual’s estate, in turn reducing the amount of inheritance tax (IHT) which is due after their death.
This makes it a really useful tool and is commonly used as part of inheritance planning, however, should the donor die too soon after making the gift, the beneficiary could potentially be responsible for settling any tax liability on it.
The rules around gifts are as follows:
Gifts given less than 7 years before you die may be taxed depending on:
- Who you give the gift to and their relationship to you
- The value of the gift
- When the gift was given
- Household and personal goods, for example, furniture, jewellery or antiques
- A house, land or buildings
- Stocks and shares listed on the London Stock Exchange
- Unlisted shares you held for less than 2 years before your death
Any money you lose when you sell something for less than it’s worth can also be counted as a gift. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.
Who Doesn’t Pay Inheritance Tax?
There are some exemptions on Inheritance Tax. Inheritance Tax doesn’t have to be paid on gifts between spouses or civil partners, meaning you can give them as much as you want during your lifetime, so long as they:
- Live in the UK permanently
- Are legally married or in a civil partnership with you
There’s also no Inheritance Tax to pay on any gifts you give to charities or political parties.
How Inheritance Tax on a Gift is Paid
Any Inheritance Tax due to be paid on gifts is typically paid by the estate, unless you give away more than £325,000 (the current nil rate band) in gifts in the 7 years before your death. Any recipients of gifts over the nil rate band within those 7 years will be liable for paying Inheritance Tax on their gift.
For example, if you gave away £300,000 one day to your first child and then £300,000 the next day to your second child, then died within the next 7 years, the nil rate band of £325,000 will use up the value of those gifts, meaning your first child isn’t responsible for any inheritance tax, whereas your second child would be taxed on the remaining £275,000 of their gift.
Of course, this is a less than ideal situation and can lead to arguments among the recipients, which no one wants.
How Can I Make it Fair?
One way to guarantee parity in respect to the gifts your children receive is by including a clause in your will which states that any inheritance tax payable on a failed potentially exempt transfer is payable from your residuary estate as opposed to the recipient of the gift. This way, none of your children will be personally liable for the inheritance tax.
Using Allowances to Give Tax Free Gifts
Alternatively, you can spread out the gift giving over a longer period of time and benefit from annual exemption as opposed to gifting one lump sum. This is because each tax year, you’re able to give away some gifts free of Inheritance Tax.
Annual exemption allows you to give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. You can give gifts or money up to the value of £3,000 to one person or split it between several people.
You can also carry any unused annual exemption forward to the next tax year (6 April – 5 April following year) but this can only be done for one tax year.
You’re also able to give as many gifts as you like with a value of up to £250 per person during the tax year so long as you haven’t used another exemption on the same individual.
It’s worth noting that anything you leave in your will doesn’t count as a gift but will be part of your estate. Your estate is all your money, property and possessions left when you die. The value of your estate will be used to work out if Inheritance Tax needs to be paid.
Estate Planning with Ryans
Few of us want to start thinking about dying, but equally, few of us could live with the thought that we have not made adequate provision for family and friends who survive us. The sooner you make the arrangements, the greater your chance of taking full advantage of the tax opportunities available, thereby maximising the amount that goes to your beneficiaries.
At Ryans, we provide a discreet estate planning service that includes:
- Help with drawing up and reviewing your will
- Making full use of exemptions and lower tax rates on lifetime transfers
- Optimising lifetime transfers between spouses
- Transferring agricultural or business property
- Transferring assets into trust
- Arranging adequate life assurance to cover potential inheritance tax liabilities
As morbid of a conversation it may be, it’s one that should happen before it’s too late, so let’s talk.