Inheritance tax planning to reduce liability with gifts
Inheritance tax can be a significant financial burden for families, but effective planning can help reduce its impact. Many people wonder, "How can I minimise the inheritance tax my loved ones will have to pay?" The answer lies in understanding the various exemptions and allowances available for gifting during your lifetime. By making strategic gifts, you can pass on wealth without incurring hefty tax liabilities.
This blog will guide you through the essentials of inheritance tax planning, including annual gift exemptions, potentially exempt transfers and other tax-free gifting options. We’ll also discuss how specific gifts, such as those for weddings or education, can provide additional benefits. With the right approach, you can ensure that more of your hard-earned money goes to your family and friends rather than the taxman. Let's understand the strategies that can help you achieve this goal effectively.
What is Inheritance Tax Planning?
Inheritance tax planning involves organising your financial affairs to minimise the amount of tax your beneficiaries will pay when you pass away. In the UK, inheritance tax is charged on estates valued above a certain threshold, currently set at £325,000. If your estate exceeds this limit, your heirs may face a tax rate of 40% on the amount over the threshold
Effective inheritance tax planning allows you to make use of various exemptions and reliefs that can significantly reduce this tax liability. This includes making gifts during your lifetime, utilising annual gift allowances and taking advantage of exemptions for gifts to spouses or charities.
By planning ahead, you can ensure that more of your wealth is preserved for your loved ones rather than going to the government. Understanding the rules and options available can help you create a tailored strategy that meets your financial goals and supports your family’s future.
How to calculate inheritance tax?
By planning ahead, you can ensure that more of your wealth is preserved for your loved ones rather than going to the government. Understanding the rules and options available can help you create a tailored strategy that meets your financial goals and supports your family’s future.
Exemptions and Allowances
When it comes to inheritance tax planning, understanding the various exemptions and allowances is crucial. Here are some of the key ones to be aware of:
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Annual Gift Exemption: Each person has an annual gift exemption of £3,000, which allows them to make gifts up to this amount without incurring inheritance tax. If you don't use the full £3,000 in one year, you can carry over the unused portion to the next year, up to a maximum of £6,000.
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Small Gifts Exemption: You can make small gifts of up to £250 per person per tax year without incurring inheritance tax. This exemption can be used in addition to the annual gift exemption.
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Potentially Exempt Transfers (PETs): Gifts made during your lifetime that exceed the annual exemption are known as potentially exempt transfers (PETs). If you survive for at least seven years after making a PET, it becomes exempt from inheritance tax. If you pass away within seven years, the PET will be subject to inheritance tax, with the tax liability reducing over time (known as taper relief).
By understanding and utilising these exemptions and allowances, you can make significant progress in reducing your inheritance tax liability and ensuring that more of your wealth is passed on to your loved ones
Tax-Free Gifts: Who Can You Gift To?
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Spouse or Civil Partner: Gifts to your spouse or civil partner are exempt from inheritance tax, regardless of the amount. This exemption applies to both lifetime gifts and gifts upon death. If your spouse or civil partner is not domiciled in the UK, the exemption is limited to £325,000.
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Charities and Political Parties: Gifts to registered charities and qualifying political parties are exempt from inheritance tax. This exemption applies to both lifetime gifts and gifts upon death. Gifts to charities can also reduce the inheritance tax rate on the rest of your estate from 40% to 36% if you leave at least 10% of your net estate to charity.
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Certain Trusts: Gifts to certain types of trusts, such as discretionary trusts and interest in possession trusts, may be exempt from inheritance tax. However, the rules around trusts can be complex and it's important to seek professional advice to ensure that your gifts are structured correctly.
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Educational Institutions: Gifts to educational institutions, such as universities and schools, may be exempt from inheritance tax. This exemption applies to both lifetime gifts and gifts upon death.
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Maintenance of Dependents: Gifts for the maintenance of a dependent, such as a child under the age of 18 or a disabled person, may be exempt from inheritance tax. This exemption applies to both lifetime gifts and gifts upon death.
When it comes to inheritance tax planning, it's important to understand who you can make tax-free gifts to. Here are some of the key individuals and entities you can gift to without incurring inheritance tax:
It's important to note that while these gifts may be exempt from inheritance tax, they may still be subject to other taxes, such as income tax or capital gains tax. Additionally, some gifts may be subject to certain conditions or restrictions, such as the need to survive for at least seven years after making a potentially exempt transfer (PET).
Which Gifts Are Tax-Free?
Here are some gifts that are tax-free under UK inheritance tax rules:
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Annual Gift Exemption: You can gift up to £3,000 each tax year without incurring tax.
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Small Gifts Exemptions: Gifts of up to £250 per person per tax year are exempt.
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Gifts to Spouses and Civil Partners: Unlimited gifts to your spouse or civil partner are tax-free.
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Charitable Donations: Gifts to registered charities and qualifying political parties are exempt from inheritance tax.
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Educational Gifts: Payments for a child's education or maintenance may also be exempt.
Understanding these exemptions allows you to gift effectively while minimizing potential tax liabilities.
Taper Relief on Inheritance Tax
Taper relief is a valuable feature of the UK inheritance tax system that can reduce the tax owed on gifts made during your lifetime. It applies specifically to potentially exempt transfers (PETs), which are gifts exceeding the annual exemption limit
If you make a gift and then pass away within seven years, that gift may be subject to inheritance tax. However, taper relief comes into play if you survive for three years after making the gift. The longer you live after making the gift, the less tax your beneficiaries will have to pay.
Here’s how taper relief works
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Years 1-3: No relief is applied; the full value of the gift is taxed.
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Years 3-7:The tax liability decreases gradually. For each year after the third year, a percentage reduction is applied to the tax owed.
This means that if you survive beyond seven years, the gift becomes completely exempt from inheritance tax, allowing you to pass on more wealth to your loved ones.
Strategies for Effective Tax Planning
When it comes to inheritance tax planning, there are several strategies you can employ to minimise the tax liability and ensure that more of your wealth is passed on to your loved ones. Here are some key strategies to consider:
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Gifting During Your Lifetime: Making gifts during your lifetime, such as using the annual gift exemption or potentially exempt transfers (PETs), can help reduce the value of your estate and minimise inheritance tax. Remember to take advantage of taper relief, which can reduce the tax owed on PETs if you survive for at least three years after making the gift.
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Investing in Tax-Efficient Assets:Certain types of investments, such as business property relief (BPR) and agricultural property relief (APR), can be exempt from inheritance tax if held for at least two years. These investments can provide a way to pass on wealth to your beneficiaries without incurring inheritance tax.
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Utilising Trusts: Trusts can be a useful tool for inheritance tax planning, as they allow you to transfer assets out of your estate while still maintaining some control over them. Different types of trusts, such as discretionary trusts and interest in possession trusts, can offer different benefits and tax implications.
Inheritance tax planning can be complex and it's important to seek professional advice from a qualified financial advisor or tax specialist. They can help you develop a tailored strategy that takes into account your specific circumstances and goals.
If you are in search of expert professional advisors to plan your inheritance tax properly, we at dns tax are here to help you with inheritance tax planning. Our expert team of tax advisors specialises in handling overseas property tax matters, ensuring you comply with UK tax laws while maximising your tax efficiency.
Whether you need help calculating your taxes or want to explore tax-saving strategies, we're here to guide you every step of the way.
Contact us today at 0333 2422 572, email dnstax@dnsaccountants.co.uk, orbook a free consultation . Our friendly experts will gladly discuss your specific requirements and provide services to meet your overseas property tax needs.
Title: Inheritance tax planning to reduce liability with gifts
Description: Learn how to reduce inheritance tax with gifts, exemptions and trusts. Explore ways to protect more of your wealth for your loved ones through effective planning.
Slug: inheritance-tax-planning-reduce-liability
Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning.
I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents.
I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.