Q. I want to give money to my children and grandchildren and I have been advised that on my death my estate will be liable for inheritance tax. Will inheritance tax be paid on the gifts made to my family whilst I am still alive?
A. Simon Mee, wills and estate planning specialist with law firm, Charles Lucas & Marshall.
In its simplest terms inheritance tax is charged on the transfer of assets on death. However, gifts made during life may also be taxed. A person is entitled to give up to £3,000 each tax year without any inheritance tax being payable and if one year’s exemption is not used it may be rolled over for one year only to make a maximum of £6,000. So if you have three children each may receive £1,000. In addition, you can give a maximum of £250 to any one person each tax year as long as they receive no more than that amount from you.
Of course, you can give more than these amounts. However, if you fail to survive the gifts by seven years the value of the gift will be added to your estate for inheritance tax purposes after any annual exemption has been deducted. If the gift is substantial, tax may be payable on it and that tax may be reduced as the gift gets older.
It is important to bear in mind that you cannot continue to benefit from a gift once it has been given. Therefore you should ensure that you will have no further need of the money or asset you intend to give away.
Other exemptions and reliefs do exist, eg gifts made on the marriage of a child, but these will depend on your circumstances. It is sensible to seek advice before making any gifts for inheritance tax purposes and to keep accurate records.
I do not spend all my income and am concerned that the unused income is adding to the value of my estate and will simply increase the inheritance tax due. Is there anything I can do?
An inheritance tax exemption does exist for gifts made from excess income. However the terms upon which the exemption may be claimed are strict and appropriate records must be kept.
To qualify for the exemption, gifts must be made as a part of normal expenditure, this means they must be typical or habitual payments. This can be shown by regular payments made over time, by setting out in a letter a commitment to make those regular payments, or even by paying the premiums of a life policy owned by another person.
It must also be possible to show that the gifts are in fact made from your excess income and that your remaining income allows you to maintain your usual standard of living. This can be shown by keeping a record of your annual income and your annual expenditure. Whilst this may appear to be an onerous task it can provide an opportunity to save a significant amount of tax.
For further information contact Simon Mee on 01488 682506 or email@example.com
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