You can help out your loved ones by passing on your wealth while still alive. What is the most tax-efficient way?
People are now living much longer lives. Figures from the Office for National Statistics show the UK life expectancy for 65 year olds is now 83 for men and 86 for women.
Because of this development, as a knock-on effect, more people are receiving inheritance later in life. This begs the question: can you enjoy seeing your family benefit from your wealth while you’re still alive without paying more tax than you need to?
Help on life’s path
There are several life stages where older generations may want to help out younger relatives financially. These could include buying a first car, getting married or paying for school fees.
And given the current property landscape, another popular reason could be to help with getting on the housing ladder. Rising house prices mean first-time buyers are getting older as younger people struggle to save for the deposit. According to the Social Mobility Commission, 34% of first-time buyers in England now turn to family for a financial gift or loan to help them buy their home. This is compared to just 20% seven years ago. Meanwhile, a further 10% have had to rely on inherited wealth.
Andrew Hagger of financial research company MoneyComms says passing on your wealth while you are still alive can be a positive process for all parties.
“The person receiving the financial gift can put it to good use – something that makes their life easier – perhaps a more reliable car to get to work or help with the deposit for a first home,” he says.
“The pleasure received by the family member giving the money will be twofold. They will feel warm inside by seeing how it has helped one of their nearest and dearest plus it could be less money destined for HMRC when they die.”
Beware of Inheritance Tax
The IHT rate remains at 40% with the threshold at £325,000. UK-domiciled spouses can leave one another their entire estate tax-free. In April 2017, a new residence nil-rate band was introduced for those leaving a qualifying residence to a direct descendant. It is currently £100,000 per person and will rise each year before reaching £175,000 in 2020/21, meaning some married couples and civil partners could leave up to £1 million to their family IHT-free.
But it is only be available to people passing on their home to ‘direct descendants’, with provisions to protect those who downsize and limit the benefit for those who leave more than £2 million.
Because of this, if you can afford to, it can make sense to give away money while alive to both lessen the IHT burden and to share in your loved ones’ enjoyment of the money. However, giving away money and assets while you’re still alive can have IHT implications so it’s vital to pass down your wealth in a tax-efficient way.
The rules around gifting
Gifting can be a tax-efficient way to pass on wealth. Some gifts are entirely free from IHT. You can give away £3,000 each tax year, which carries over for a year, meaning if you haven’t used last year’s allowance then you can give £6,000 this year. You can also give unlimited gifts of up to £250 per person.
“It’s possible to make wedding gifts up to a certain amount, which are free of IHT. How much you can give depends on your relationship to the bride or groom,” says Richard Foreman, chartered financial planner at NFU Mutual. “You can give £5,000 to your child when they marry, £2,500 to a grandchild and £1,000 to anyone else”.
There’s usually no IHT to pay on regular gifts you make out of your income (provided they don’t impact on your usual standard of living).
Most other gifts are classed as ‘potentially exempt transfers’ (PETs), meaning they are tax-free if you live seven years after making the gift. “If you die within seven years, the gift is clawed back into your estate and may be taxable,” says Foreman.
“There’s a common misconception about the tapering of the seven year scale,” says Foreman. “It’s only available if the taxable gifts made in the seven years before death exceed the £325,000 IHT threshold. If not, the gifts just reduce what’s available to set against the rest of the estate.
IHT rules can change, so it’s best to seek advice when planning how to make gifts to your family either during your lifetime or on death.
If you give a gift but retain a ‘benefit’ until you die, the value of the gift will form part of your estate for IHT purposes. A financial adviser will be able to suggest solutions that could reduce your estate’s IHT liability.
YOU NEED TO KNOW
Inheritance Tax can be complex and depends on individual circumstances and may change in the future.
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