Estate Planning - Exempt Gifting Opportunities

When tackling estate planning, it is easy to focus on the potential benefits of making significant gifts. These gifts might be made on an outright basis or into trust depending on the client’s situation and objectives. It is also well known that you generally need to survive for seven years after making larger gifts, and sometimes even fourteen years, for them to be fully effective.

Whilst making larger gifts can have a big impact on a client’s Inheritance Tax (IHT) liability over time, we should not discount the value of certain gifts that are classed as exempt and can be made without any IHT implications, provided they meet specific criteria. Understanding these exemptions, even if they are relatively small, can help you manage your estate more effectively and can make a significant impact over time.

Below are the key types of exempt gifts:

1. Annual Exemption

Each tax year, you can make exempt gifts of up to £3,000. This is known as the annual exemption. If you do not use your full £3,000 allowance in one year, you can carry it forward to the next tax year (for one year only).

A couple doing this for the first time could make exempt gifts of up to £12,000 which would result in a day-one IHT saving of £4,800. If they continued to gift £6,000 per annum for the next ten years this would equate to total gifts of £72,000 and a total IHT saving of £28,800.

2. Gifts Out of Excess Income

Regular gifts can be made from your surplus income but must:
- Be part of your normal expenditure.
- Be documented to show they come from your income rather than your capital.
- Not affect your standard of living.
If you have post-tax income of £70,000 but can show that you only spend £60,000 each year, you can gift up to £10,000 away which will be exempt from any tax. This is in addition to the annual exemption detailed above. When calculating your total income, you can include income from non-taxable sources such as ISAs.

3. Gifts on Marriage or Civil Partnership

Tax-free gifts can be given to someone getting married or entering a civil partnership. The amount you can give depends on your relationship to the recipient:

Parents: Up to £5,000
Grandparents and great-grandparents: Up to £2,500
Other relatives or friends: Up to £1,000

4. Small Gifts Exemption

You can give as many gifts of up to £250 per person per tax year as you like, provided you haven't used another exemption on the same person.

For example, you might have used your annual £3,000 allowance by making gifts to your children. In this case, many then use the £250 exemption by making gifts to their grandchildren on special occasions. If you have four grandchildren, you can give them each £250 per year which is another £1,000 out of your estate.

5. One-Off Gifts

One-off gifts that exceed the annual exemption can be made, but they may be subject to Inheritance Tax if you pass away within seven years of making the gift. These are known as potentially exempt transfers (PETs). If you survive for seven years after making the gift, it becomes fully exempt.

Record-keeping

It is essential that you keep good records of any gifts made and which exemption, if any, you are hoping to take advantage of. This ensures that the executors of your estate can easily complete the relevant forms when assessing and paying any IHT liability that might be due when you die. We are able to help with this if needed and can even hold the information as part of your client file.

By understanding and utilising these exemptions, you can effectively manage your estate and significantly reduce the IHT burden on your beneficiaries, ensuring more of your estate goes to those who you wish it to.

Please contact your Wealth Manager if you would like to discuss any of the above.

Written by Philip Feast

General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.