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Can I gift assets to avoid or reduce inheritance tax in the UK?

A mother leaving a gift to her daughter after asking herself, "Can I gift assets to avoid or reduce inheritance tax in the UK?"

Inheritance tax is an important consideration if you wish to preserve assets for future generations and not have them eroded by tax. If you’ve heard of gifting, you might have asked yourself, “Can I gift assets to avoid or reduce inheritance tax in the UK?” (Before reading this article, we suggest you first look at, What is Inheritance Tax in the UK?)

Gifting is just one of several strategies for reducing the inheritance tax burden on your estate, or potentially avoiding it altogether. Of those options, it is relatively straightforward and perhaps the easiest to understand.

Gifting means giving away money and other assets during your lifetime so that you no longer own them. However, there are various rules and pitfalls to understand before you do anything. Chief among them is the time period you have to survive after you make a gift.

Before we move on to that, let’s look at the basic inheritance tax rules and why you might need to gift assets in the first place.

Why does gifting work?

When you die, you can pass on a certain amount free of inheritance tax. The “nil rate band” as it’s called is currently £325,000 per individual or £650,000 for married couples and civil partners.

If you have a property that you’re passing to “lineal descendants”, including children, stepchildren and grandchildren, your estate can claim another allowance of £175,000 (provided your property is worththat much). This becomes £350,000 for married couples and civil partners.

The upshot is that individuals can pass on up to £500,000 and married couples and civil partners can pass on up to £1 million if they have a property and lineal descendants.

Now consider that the excess amount is taxed at 40%. If you can keep your estate under your allowances, there’d be no inheritance tax to pay and that’s where gifting comes in.

But while gifting can be a good strategy, there are HMRC rules to be aware of.

The Seven-Year Rule

One of the primary factors to consider when gifting assets is the so-called seven-year rule. If you survive for seven years or more after making the gift, it falls outside the scope of inheritance tax. However, if you pass away within this timeframe, the value of the gift may still be subject to tax, albeit at a reduced rate on a sliding scale.

Exemptions and Allowances

Certain gifts are exempt from inheritance tax regardless of the seven-year rule. These include annual exemptions, small gifts, and gifts in consideration of marriage or civil partnership. Understanding these allowances and exemptions is crucial in maximizing the benefits of gifting because you don’t have to worry about the seven-year rule.

Gifts with Reservation of Benefit

This is where many people slip up, although the rules are very clear. If you gift something to somebody else, you must have truly given it away. You cannot continue to enjoy the benefit of it. If you claim to have given away a valuable painting to your daughter, it cannot still be hanging on your wall to admire every day. This is called a gift with “reservation of benefit” and more commonly it’s discussed in relation to property. You cannot give your home to your children, for example, and continue to live in it rent-free if you want to avoid inheritance tax.

Gifting into trusts

Gifting into trust is another form of gifting. Instead of giving assets to another individual, you instead gift them into a trust. This might give you more control and flexibility than a direct gift, although you still cannot benefit from the asset if you want to avoid inheritance tax. In addition, there are separate trust taxes that apply when you put assets into trust and, potentially, on your death as well.

Things change

None of us knows the future and so gifting is something you should do with caution. What if you need care fees one day? Or what if you fall out with the person you made a gift to? Don’t give something away unless you’re sure you won’t need it back.

And then there’s tax law. What if the Government scraps inheritance tax in the future, or makes the allowances more generous? It’s something we might hope for but there’s no telling if it will happen. You can only ever make plans based on the law as it is today, not a future change that might never come.

Summary

Gifting assets can be a strategic and effective method for minimising inheritance tax on your estate. However, it requires careful planning, a thorough understanding of the rules and regulations, and consideration of the potential implications.

In my experience, I’ve seen that tax laws and tax reliefs are subject to change. For this reason, it’s essential to stay updated and reassess your estate planning strategies periodically. By taking a proactive approach and seeking professional advice, you can make informed decisions that not only reduce inheritance tax but secure a legacy for your loved ones. At the same time, don’t overlook your own financial goals and needs in the years ahead.

The information contained in these articles is for general interest purposes only. We take every precaution to ensure that the information is correct at the time of publishing but errors can occur. Given the changing nature of laws, rules and regulations, there may be omissions or inaccuracies in the information. Bristol Wills & Estate Planning Ltd is not responsible for any errors or omissions or for any results obtained from the use of this information. You should never rely on the information in these articles as a substitute for professional legal advice, whether from Bristol Wills & Estate Planning or any other legal service or professional.

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