Sensible estate planning to reduce your Inheritance Tax (IHT) liability is underpinned by a tax efficient will along with prudent investment in tax friendly products, possibly IHT insurance and using your IHT gift exemptions.
For IHT purposes, your estate consists of the assets in your sole name, your share of any joint assets and any gifts within seven years of the date of your death. Once you survive any gifts by seven years, they fall out of your estate for IHT purposes.
Every individual can make gifts of £3,000 per year, together with an unlimited number of gifts to different people of £250 each – gifts that are often made to children and grandchildren at Christmas or birthdays.
In addition there is an exemption for gifts made in consideration of marriage of £5,000 for a child, £2,500 for a grandchild or great grandchild or £1,000 for any other person.
Another useful and under-used exemption is “normal expenditure out of income”. If your income exceeds your expenditure and living expenses, provided you follow some simple rules, you can gift the “spare” income in addition to the exemptions referred to above.
These gifts cannot be one-offs and there should be a regular pattern to these payments. You are not compelled to make gifts every year, especially if you do not have excess income in any given year! However, you must show commitment regarding future expenditure.
HM Revenue & Customs will require you to keep annual records of your income and expenditure to prove this excess income. We have prepared a useful form to help you keep your records (available free of charge on request) and your accountant or tax adviser can help you to complete them as much of the information will be available when completing your income tax returns.
Gifts out of income can be used to pay premiums on life insurance policies held outside the estate: paying grandchildren’s school fees, payments under a Deed of Covenant, cash gifts or contributions into a child or grandchild’s pension fund. Cash gifts allow your children to use up their ISA tax free allowances. Contributions into your children’s or grandchildren’s pension funds have the added advantage that your child can claim tax relief on the payment, amounting to an additional 20% or 40% contribution to the pension fund. A further incentive is that you help to build a healthy pension pot for your children’s future and, once in the fund, protect the capital from any temptation to spend it.
This article was first published in Newsbrief, Spring 2007.
For more information or advice on inheritance tax gift exemption, please contact John Rouse.
