There are lots of reasons people don’t want to give away a slice of their hard earned cake! However, it could help you reduce your estate and therefore your Inheritance Tax liability.
1) I don’t know the rules, I don’t want to cause a problem with the tax man.
2) Don’t you have to live 7 years for it to be tax free?
3) I don’t know if I will need it myself.
4) I don’t want to spoil my family, they should wait. I had to.
There are perfectly legitimate ways to give money away every year regularly which very few people use.
As long as you can prove the gift is from surplus income and does not affect your living standards then this is immediately outside your estate. You do not have to wait seven years and there is no limit provided all conditions are met! The gift does have to be habitual though.
If you want to give away cash (i.e. an asset that is not income/interest/dividends) you can still do that, but there is a £3000 limit. In addition to these gifts, possibly given on birthdays or Christmas, there are other situations where you can make a lump sum gift, such as up to £5000 for a child’s wedding, or up to £3000 to a charity. Even if you had two children marry in the same year (heaven forbid!) it is possible to make the total £10,000 gift in the same tax year. You can also carry £3000 forward from the previous year if you’ve got behind.
The rules are a little complicated I grant you, but with a good financial plan showing income and expenditure, and a little record keeping it can be easily managed. We help our clients keep track of the gifts they make as well as provide the evidence for HMRC that they meet the requirements in the time period they were given.
On point 2, yes we are agreed, if you make a substantial gift (over £3000 and from capital assets) generally you have to wait seven years until the gift is no longer eligible for Inheritance tax. There is no giving away everything on your death bed! Unfortunately people do tend to leave it rather late to think about these things, bringing me to point 3.
The reason people tend not to address this until the 11th hour is because they don’t know how much money they will need for themselves. Here at FMB we use cashflow modelling with our clients to work out how long their money will last, what their needs will be and whether they are likely to have surplus funds towards the end of their life. We have enabled people to help their children with house deposits and university fees, in full knowledge that they CAN afford it. Obviously we don’t have a crystal ball, but we can make some common sense assumptions which will help you make decisions about how much money you can afford to gift. Giving gifts from income and using the allowances available each year can chip away at your IHT liability without giving too much away in one go.
As to point 4, this is a very personal decision but I would say this:-
Why not enjoy watching your family enjoy the fruits of you labour?
Often children receive an inheritance when they are financially established themselves why not give them some money when it could have really made a difference?
You can suggest the money is for a specific purpose such as a home improvement or new car. Or the money can be placed in a trust or pension to delay the gift.
I have explained the rules simply here, you need to take advice from a financial planner or accountant to ensure you have complied correctly with gifting. To look further at the rules HMRC have a page on their website which explains it all. Cick here.
This advice is not regulated by the Financial Conduct Authority. FMB always suggests clients use a tax advisor to submit tax returns.