As the end of the tax year looms on April 5, families should take advantage of rules that allow them to make tax-free gifts to loved ones. However, IHT is complicated and mistakes can cost you and your family dear.
Parents and grandparents can help younger family members get on in life by taking advantage of inheritance tax allowances to pass money on without HM Revenue & Customs (HMRC) grabbing a slice.
Yet a number of these expire at the end of the financial year on April 5, reducing the amount you can give away while avoiding the hated 40 percent death tax.
In last year’s Budget, Sunak froze the IHT nil-rate band at £325,000 for another five years. It has already been frozen at this level since 2009.
The £175,000 nil-rate residence band for families passing on their main residence to direct descendants such as children and grandchildren has also been frozen until at least the 2025/26 tax year.
This “stealth tax” will drag more into HMRC’s net as house and share prices rise, said Mike Hodges, tax partner in the private wealth team at Saffery Champness.
“IHT is a deeply unpopular and divisive tax but boosted Treasury coffers by a staggering £5 billion in the year to January. That’s an incredible £700 million than the year before.”
Gifting is good way to shrink your exposure, provided you do it carefully, said Heather Owen, financial planning expert at Quilter. “Every adult can gift a maximum £3,000 each year with no IHT to pay, so couples can combine their allowances and gift £6,000.”
You can mop up unused allowance from last year, so couples could potentially gift £12,000 in total. Everyone can make smaller gifts of £250 to as many people as they like, provided they have not benefited from the £3,000 limit.
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Parents can also gift £5,000 if any of their children are getting married. You can also gift £2,500 to a grandchild or great-grandchild on marriage, and £1,000 to another relative or friend.
You can make regular payments to help with another person’s living costs, known as “normal expenditure out of income”, provided it does not affect your own standard of living.
Further gifts are known as “potentially exempt transfers” and only entirely IHT-free if you live seven more years.
Charitable donations could reduce your overall IHT liability from 40 percent to 36 percent.
Yet gifting has its dangers so avoid making these costly and dangerous mistakes.
Don’t be too generous. If you gift cash it is very difficult to get it back. So make sure you have enough money for later life and will not run out.
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Consider future care bills. If you need nursing home care but lack the funds to pay for it, you may have to sell your home and other assets.
Watch out for divorce. If you give money to, say, a child who later divorces, their partner could take half. Death is also a risk, because if the recipient dies early, the assets will pass to their spouse or civil partner.
If concerned, consider gifting within a discretionary trust, where the funds are excluded from divorce settlements and creditors, giving you more control.
It could get frittered. If you fear your cash will be squandered by a reckless recipient going on a splurge, think carefully before giving it away.
Getting hit by a shock IHT bill anyway. It is easy to make mistakes in such a complex area, and they can be expensive. So consider taking specialist advice to make sure you get it right.
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