How to Gift Money Without Being Taxed
Most people know that inheritance tax is a tax charged (at 40%) on your estate when you die. If your estate is worth more than the inheritance tax threshold (currently £325,000) then the whole of the estate above that figure will be subject to the tax. There are, however, a number of exemptions of which you may be able to take advantage, effectively amounting to state-sanctioned tax avoidance!
All outright gifts are free of inheritance tax provided you survive seven years from the date of a gift. If you do not survive the full seven years then taper relief may be available on the tax payable on the gift, but only in very restricted circumstances. The relief will also be denied if you retain any benefit from the property which you have given away, otherwise known as a “gift with reservation of benefit” in the inheritance tax jargon.
Gifts made to charity are exempt from inheritance tax whether made in your lifetime or on death (in other words in your Will). Although we encourage our clients to leave legacies to charities in their Wills there is much to be said for the gifts being made in your lifetime because not only will the gifts reduce the size of your estate (and thus save inheritance tax) but you may be able to claim Gift Aid for income tax purposes. Perhaps it is better to do both!
In part we say this because of a new reduced rate of inheritance tax (38% rather than 40%) which has been introduced and will apply to those individuals who leave 10% or more of their estate to charity. In making the calculation, the taxman disregards property that attracts other exemptions or reliefs (including the nil rate band of £325,000), assets passing to your spouse (which are also exempt) and so on. Essentially, if you get the sums right, large amounts can be left to charity without significant loss to your beneficiaries, the biggest loser overall being the Inland Revenue!
It is even possible for your beneficiaries (or you if you are a beneficiary of someone else’s Will) to get together after someone has died and agree to redistribute the estate (using what is known as a “Deed of Variation”) to take advantage of this new rule.
A very important but often ignored tax allowance for inheritance tax purposes is that which applies to gifts made out of excess income. Inheritance tax is a tax on capital. If you have excess income in any given year and give away that excess income then, provided that the gift is of a regular nature, it is completely free of inheritance tax (no other exemptions need to be applied against it and the seven year rule does not apply). In principle, this is a very easy allowance to understand but in practice it is very difficult to obtain because detailed records are required. If this is something which you feel might apply to you then it is very important that you keep annual records of your income and expenditure and that these are accurate.
Perhaps the least known exemption is that which applies to payments made for the maintenance of dependent relatives. An obvious example would be paying for the school fees of your infant children. On the face of it, these appear to be “gifts” and would be taxable under the inheritance tax regime but are exempt as payments made to dependent relatives. How many individuals, however, find themselves helping out elderly relatives with their living expenses? If you are in this situation then you, too, might be able to claim an inheritance tax exemption. There are some surprising circumstances in which this allowance is applicable and if you would like to explore this further, please contact us.
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