Inheritance tax – How to gift this Christmas and avoid 40% tax

Inheritance tax: Expert provides tips on avoiding hefty bill

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There are now less than 100 days until Christmas Day, and many people will be planning their festivities. While some will buy presents, others will be looking to gift in a more long-term way, either to loved ones or charities.

Although Christmas can be a good time to start gifting, tax rules will need to be considered.

Shona Lowe, financial planning expert at abrdn, shared her guidance with Express.co.uk.

Firstly, she stressed, it is vital to understand inheritance tax rules around lifetime gifts to avoid making a mistake and to gift in the most efficient way.

Ms Lowe explained: “Each tax year (April to April), you can give away some money or possessions free of tax. 

“Some people use this as a way of treating their families while they are here, and this reduces their wealth too which is why it can help reduce their future inheritance tax bill.

“Inheritance tax (IHT) is also a tax on some lifetime gifts so knowing how and when it applies, or perhaps more helpfully, when it doesn’t, allows you to make good decisions about who to gift to and how much to give.”

Inheritance tax is paid on a person’s estate when they pass away and is set at a rate of 40 percent.

The tax is only applicable to the value of an estate above a certain threshold, usually £325,000.

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However, when it comes to gifting specifically, there is an important matter to consider: the seven-year rule.

Ms Lowe said: “One thing that many people wrongly assume is that if they make a gift, the amount of that gift will always reduce the value of their estate for IHT purposes straight away. 

“Unfortunately, that’s not always the case, with some gifts taking seven years to leave you for tax purposes. It all depends on the amount you gift and who it’s to.”

When it comes to making smaller gifts, IHT rules permit people to give away up to £250 to as many individuals as they wish – and not only at Christmas. This is the case as long as that person only gets the sum once a year. 

The small gifts exemption means the amount given away immediately falls outside of the estate without the seven-year rule coming into play.

Ms Lowe also highlighted a rule which could help those who know someone having a winter wedding.

She continued: “If you’re looking forward to a loved one tying the knot this winter, you can give them a special wedding gift without having to pay tax at the time or waiting seven years for it to leave your estate. 

“If it’s your child, you can give then up to £5,000. And for a grandchild, it’s up to £2,500. It’s not limited to family either – you can give a wedding present of up to £1,000 under this exemption to any person you choose.”

Some people use Christmas to make bigger gifts, such as putting towards a house deposit or paying off school fees – and the annual exempt amount could help.

This rule allows people to give away up to £3,000 each year without paying IHT, and the sum can be split between as many people as a person likes, as long as it is kept in the limit.

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Those planning gifting with a spouse or partner could roll together their annual exempt amounts to increase the sum to £6,000.

Ms Lowe highlighted another valuable gift allowance people may wish to consider this Christmas: the exemption for normal expenditure out of income.

She added: “If you have more income that you need and can afford to give some of that away on a regular basis without it affecting your normal standard of living, you can give that excess away. As long as you meet all the requirements, there’s no upper limit on the amount you can give away.  

“You won’t pay inheritance tax when you make the gifts and you don’t have to wait seven years for them to leave your estate for tax purposes.”

Finally, Ms Lowe urged people to keep a record of any gifts a person makes during their lifetime whether this is at Christmas or another time.

This is because it is likely to help gifts being properly reported to HMRC, and a person’s estate to get the exemptions to which they are rightfully entitled. 

In the same sense, some may wish to seek financial advice regarding the decisions they make, but free guidance is also available online. 

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