Money
Retirement
Taming Inheritance Tax - part two
There are several ways to reduce the amount of IHT which is due. Anything you give away more than seven years before your death is completely exempt from Inheritance Tax.
So if you are healthy and you have substantial assets and you start giving them away in, say, your fifties or sixties then as long as you live seven years from the date of the gift no IHT will be due on that money. Technically these are called Potentially Exempt Transfers or PETs as they are exempt if you live another seven years.
But, and there is a big but here, if you give something away and continue to use it then it is still counted as part of your estate. For example you might give your daughter a valuable painting but she lets you continue to hang it on your wall. A present like that is called a 'gift with reservation of benefit' or GROB. And it counts as yours not hers when your estate is taxed.
This rule applies equally to your home. So if you give your home to your children but you continue to live in it then it is counted as your property, not theirs, when you die. In theory it would be possible for you to live in the home without any benefit if you paid your children the market rent for it. But they would have to pay income tax on the rent and they would also have to pay capital gains tax on the rise in value of the home from when you make the gift to the time you die. So it is usually not a good idea.
There is one exception to this rule. If you give your home away to a relative, move out, but then have to move back either due to unforeseen circumstances or because you are unable to maintain yourself due to old age or infirmity, then its value may not form part of your estate. This rule is complicated and the Revenue will look carefully at any claims to make use of it.
There is another problem with giving things away. If you give away an object or an investment which is now much more valuable than when you acquired it - perhaps some shares you bought in the 1960s - then you may have to pay Capital Gains Tax on the growth in its value. When you give it away, the tax is calculated as if you had sold it at market price on that date. So it is much simpler to give away cash.
Some things are exempt from Inheritance Tax even if you give them away and die shortly afterwards. You are allowed to give away up to £3,000 each tax year without it counting towards the IHT arithmetic at all. And if you gave nothing away in the previous tax year then you can bring £3000 forward from that year and give away £6000 this year without running the risk of IHT being due on it even if you die tomorrow.
If there is a wedding in the year then you can give up to £5,000 to a child of yours as a wedding gift - and up to £2,500 to a grandchild (or great-grandchild) or £1,000 to anyone else on their marriage. The gift has to be conditional on the wedding taking place.
You can combine these two exemptions. So you can give £5000 to one of your children on their marriage and give them up to £3000 as well. Apart from these two big exemptions you can give away any number of small gifts up to £250 each to any number of separate people. However, these recipients cannot also get money from you under any other exemption.
You can also give away income free of tax. If you have a high income and can afford to give away part of it without reducing your own lifestyle, then that is also completely exempt. For example an elderly widow who inherited a good pension from her late husband might now feel her income considerably exceeds her needs. The balance could be given to younger members of the family rather than accumulating in her bank and being liable for tax when she eventually dies.
Another exemption allows you to give money for the maintenance of someone without it counting as part of your estate. There are three separate exemptions. First, if you give your ex-spouse (or ex-civil partner) a gift for their maintenance that is exempt. Second, gifts to your children (but not grandchildren) are also exempt while they are in full time education if the money is given for their maintenance or the costs of their education or training. So if a parent pays off a child's student loan or pays their tuition fees then that payment should be exempt from IHT. Take care to pay it by 5 April after their full time education comes to an end or it may not be exempt. Thirdly, you can give money to any relative who is financially dependent on you. These three exemptions are in Inheritance Tax Act 1984 s.11.
Anything left in your will to a registered charity, to a university, to a national museum or art gallery, or to one of the eight political parties which have at least two MPs in the UK Parliament is completely exempt from Inheritance Tax. These are laudable aims. However, giving money to charity should be done for its own sake not as a way to avoid tax. Your heirs will be better off having 60 per cent of something than 100 per cent of nothing.
