The most common way to pass on wealth to the next generation is to make a Will. With effective planning you can ensure that your estate is dealt with according to your wishes, and that your loved ones are provided for after your death.
But what if you want to share your wealth before you’re gone? Watching your children or grandchildren achieve their ambitions, giving a wedding gift they’ll never forget, or experiencing a holiday of lifetime are all achievable through gifting.
Leaving gifts can also be an effective way of passing on wealth without incurring additional taxes. As it isn’t linked to any exemption, substantial gifting, as a tax planning tool, is easy to implement so long as the right conditions are being met. We explain more below:
Things To Consider When Gifting
1. Can You Afford To Gift?
The first most important thing to check when gifting is whether you’re able to afford to gift. This may seem obvious, but before gifting you should look at the assets you have in place, and make sure you have enough money for the rest of your life, before making arrangements for loved ones.
2. Gifting To Avoid Unwanted Tax
The next thing to consider is how you want to gift. This can be done in a number of ways to avoid any unwanted tax, including:
- Using your annual exemption – Up to £3,000 can be gifted to anyone you choose each tax year without it being taxed. This can also potentially be carried forward from the previous tax year (so long as the allowance hasn’t already been used) making the total amount you can gift £6,000 over a year
- Making smaller gifts – unlimited smaller gifts of £250 can be made per person (so long as they haven’t already benefited from using your annual exemption)
- Weddings and civil ceremonies – as a special gift to celebrate the union of loved ones, parents can both gift up to £5,000 each when celebrating their child’s wedding. Grandparents can also gift, however the limit is slightly lower at £2,500 per person.
It’s important to note, when gifting money or assets, you must ensure that you don’t retain any benefit from giving an asset or money away.
3. Making Regular Gifts From Your Income
You can also choose to make larger gifts out of your excess income.
However, there are specific rules when making regular gifts, if not followed correctly, your child or grandchild may be subject to tax:
- Payments must be regular – a regular gift doesn’t need to be the same amount on the same date each month but there will need to be a degree of regularity. A record of payments should be made to provide evidence of the exemption. The record should clearly state that the payments are intended to form a regular pattern
- Money should come from any surplus income – as with making any gift, you must be able to prove that giving away money regularly will not affect your standard of living.
4. Seven-Year Exemption Rule
Outright gifts outside of the rules listed above will be potentially exempt transfers and may be subject to tax further down the line. If you die within seven years of giving money beyond the gifting rules, it will be considered part of your overall estate and could be subjected to Inheritance Tax (IHT) following your death. If seven years pass following a gift, the money will not be taxed.
The same rule applies when gifting property. IHT can be avoided if you live seven years after giving the property away, this only applies if you give away the property and move out. If you choose to give away the property, but still reside there, you’re required to pay a monthly rent and your share of the bills for the seven years to qualify for the IHT exemption.
5. ‘Death-bed’ gifts
Although best avoided, death-bed planning can be a valuable last resort for those who have become ill unexpectedly to pass on wealth to the people they choose. Although they are often open to disputes. Making a death-bed gift can be used as a tool to reduce tax to bring the ‘estate’ below £2 million at death for the purpose of qualifying for the residence nil rate band, which will be tapered once an estate is over £2million.
Death bed gifts won’t work to reduce the value of the estate for calculating inheritance tax generally, as the person making the gift will not have survived for seven years from making it.
Lifetime gifting for some can be the best way to see your loved ones enjoy your wealth before passing away. However, it comes with specific rules that must be followed to ensure you and your loved ones won’t be subjected to extra taxes. Our team of lifetime and estate planning experts are able to guide you through the process of making gifts, and ensuring your assets are shared under your wishes.
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Supporting You And Your Family
Future planning is one of the biggest investments you can make – not only for yourself, but for your loved ones as well. Please visit Supporting You And Your Family for more ways you can plan for the future.