Inheritance Tax UK: How gifting could be the ‘sensible’ decision to help family members

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Inheritance tax has been at the centre of a number of debates, with some deeming the payment as a “death tax”. However, there are a number of ways to reduce an IHT bill, with gifting often at the forefront of ways to slash tax. Neil Rushton, Chartered Financial Planner at financial experts Old Mill, spoke to about Inheritance Tax.

He provided insight into how gifting could be the perfect gift this Christmas, allowing older generations to offer financial support to loved ones, and good causes in a tax-efficient way.

Mr Rushton said: “In general, older generations were already in a better financial position than younger ones before the pandemic.

“Baby boomers are the only generation to be richer than both their parents and their children and many have found themselves in an even stronger position as a result of reduced spending during the crisis, while younger generations have been hit by job losses and reduced income.

“Passing on wealth to children and grandchildren now, rather than as an inheritance, makes a lot of sense. 

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“First of all, it is obviously much nicer to be able to see your family benefit from the money while you are still alive, but also, it makes sense to pass it on now, when they actually need help, rather than have them inherit when they are retired or nearing retirement themselves.”

Mr Rushton said that one of the most common concerns for people when considering how to help their family is the fact they could end up running out of money themselves.

However, while this concern is legitimate, it could mean wealth is locked away until death, meaning it will be subject to an unnecessary, and potentially hefty Inheritance Tax bill.

With the average IHT bill reaching almost £200,000, many will be looking for ways to avoid the fee in what is likely to be an already emotionally fraught time when someone passes away.

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For those looking to provide gifts this Christmas and beyond for IHT purposes, there are a number of ways in which to do so.

Firstly, Britons should consider their annual gift allowance, which permits them to gift up to £3,000 each tax year without IHT implications.

The £3,000 can also be carried forward for one year if individuals do not use the full sum.

A small gifts exemption should also be considered, as this option allows tax-free gifts of up to £250 to any number of people in the same tax year.

But it is worth noting these smaller gifts cannot be given to anyone who has already received part or all of someone’s annual gift allowance.

Finally, gifts can also be made from normal expenditure out of income, but these conditions must be met:

  • the gift must be out of income, not capital
  • it must be a regular gift
  • it must not reduce a person’s standard of living.

Mr Rushton explained this could be a good option for those who wish to regularly support their family, but advice should always be taken.  

Gifting, however, aside from helping family members, could also provide assistance to charities.

Many Britons have their favourite charities to give to at present, helping their passions, interests or hobbies, and as such, they may wish to leave a parting gift in their will.

This can be a win-win situation, allowing charities to benefit, but also Britons to have less to meet in IHT.

Mr Rushton added: “Gifting is a great way to help out charities, eight in ten of whom say they fear the crisis has negatively impacted their ability to deliver planned objectives over the next 12 months.

“If you want to help charities this year, there are a couple of ways you can do this, so that the gifts you make will be immediately outside of your estate from an IHT perspective. These are through gift aid donations, and gifts of assets.”

Gift Aid donations occur when a person confirms they are a taxpayer when giving to registered charities.

This will allow the charity to claim an additional 25p for every £1 which is donated, directly from HM Revenue and Customs (HMRC).

In addition, Britons can also claim tax relief if they are a higher rate or additional rate taxpayer.

Tax relief can also be claimed on a gift of a qualifying asset, for example shares or land, to charities.

This option is likely to be suitable for those who are gifting a large donation, but Mr Rushton has advised people to always take advice when following such an action.

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