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A new tax year brings new opportunities

A new tax year brings new opportunities

With a new tax year having just started, now is the perfect time to consider doing some Inheritance Tax planning.

Inheritance Tax – the UK’s most hated tax

Inheritance Tax was recently named the UK’s most hated tax, despite it being paid by only a small percentage of the population. However, did you know that you can reduce your Inheritance Tax liability on death by making tax-free lifetime gifts?

Rules on gifting

As a general rule, if you die within 7 years of making a gift, Inheritance Tax might be payable on the value of the gift after your death, depending on when the gift was given, its value and the recipient. However, there are a number of useful reliefs and exemptions which you can make use of to minimise your liability to Inheritance Tax.

What counts as a gift?

Gifts include:

  • Money
  • things like jewellery, furniture, antiques, etc
  • a house
  • stocks and shares

A gift can also include any money you lost when you sell something for less than it’s worth. So, if you sell your house to your child for less than its full market value, the difference in value counts as a gift.

Are any gifts exempt from Inheritance Tax?

There’s no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like so long as they live in the UK permanently and are legally married or in a civil partnership with you.

You can also make tax-free gifts to charities and political parties.

What about other gifts?

Each tax year, you can also make certain gifts free of Inheritance Tax thanks to various exemptions and reliefs.

  • Annual exemption
    Every tax year you can give away up to £3,000 worth of gifts without incurring any Inheritance Tax. This is known as the annual exemption. If you don’t use the full amount in one tax year, you can carry over any unused allowance to the following tax year, but only for one year. The tax year runs from 6 April to 5 April the following year.
  • Small gifts
    You can also make small gifts of up to £250 to as many people as you like in a tax yar, without incurring any Inheritance Tax. However, you can’t combine this with the annual exemption, and you can’t give more than £250 to any one person.
  • Wedding and Civil Partnership gifts
    You can give an Inheritance Tax-free wedding or Civil Partnership gift of up to £1,000 per person (£2,500 for a grandchild or great-child, and £5,000 for a child). It’s important that the gift is made on or shortly before the marriage or the registration of the Civil Partnership to qualify for the relief.  
  • Gifts out of excess income
    Another useful exemption from Inheritance Tax is where gifts are made as part of normal expenditure out of income, so long as the gift leaves you with enough income to maintain your normal standard of living. This exemption is currently uncapped so, for those with high earnings, it can be very valuable.
Keeping records

It’s important to keep detailed records of:

  • what you gave
  • who you gave it to
  • the value of the gift
  • when you gave it

These records will help the person who deals with your estate when you die to work out what gifts you made in the 7 years before your death.

What else should I think about?

Whilst reducing your Inheritance Tax liability on death might be an attractive idea, remember that it’s important to consider other factors. With the cost of living increasing substantially, make sure you keep enough to live comfortably. Although none of us likes thinking about it, consider whether you’ll have sufficient funds to pay future care home costs. If you’re giving away a house or shares, Capital Gains Tax is something which will need to be looked at.

How can I find out more?

Inheritance tax planning is a complex area. If you would like further advice as to how to make the most of the tax-free allowances available to you, please contact the Private Client team on 03330 430150.

About the author

Moira McInnes
Moira McInnes

Moira McInnes

Senior Associate

Wills, Trusts & Succession

For more information, contact Moira McInnes or any member of the Wills, Trusts & Succession team on +44 131 322 0172.