You know that to save your beneficiaries form paying IHT it’s important to

plan ahead. You can give away £3,000 every year without it creating a tax

problem. But is there a way to give more and still get one over the Taxman?

 

Exempt gifts

 

Individuals can make an IHT-exempt gift or number of gifts that in value add up to £3,000 or less each tax year. This could be for anything from a small birthday present to shares in a work of art. This limit is known as the ‘annual exemption’. Gifts over that value are ‘potentially exempt transfers’ known as PETs.

 

The problem with capital gifts

 

When considering IHT planning it’s typical to think about a large one-off arrangement that will reduce your estate for IHT purposes at a stroke. Complicated and expensive tax saving schemes are marketed to help achieve this. But by making a big gift, the ‘big picture’ is often overlooked.

 

Example

 

Mr Jones has an estate worth £500,000. he has income of £60,000 after tax each year. He makes a gift to his children of £185,000 (a PET) which becomes exempt from IHT after seven years. In that seven years he has spent an average of £30,000 of his income each year on living expenses, and has invested the balance. Even ignoring the growth on his savings, his estate is then worth £510,000.

 

So Mr Jones is back where he started; if he now makes another large gift to reduce his estate it will not be exempt from IHT for another seven years. So what should he have done?

 

An under-used exemption

 

In our view a much under-used exemption is that relating to gift out of income. The main legislation concerning this is s.21 of the Inheritance Tax Act 1984. This says that a transfer (gift) is exempt from IHT if the person making it can afford to do so out of their income without lowering their standard of living.they must also make the giving part of their regular expenditure.

 

The last condition manes that to obtain the exemption you cannot just give away part of your income for one year, it must be a regular arrangement. But that does not mean it has to go on forever.

 

Tip

 

By setting out the proposed arrangement in a letter to whoever you intend to make the gift to, with a witnessed copy held with your will, the arrangement will be effective immediately.

 

Example

 

Assuming the same basic details of the earlier example, if Mr Jones had made a gift of up to £30,000 for each of the seven years following his one-off gift of £185,000, the full amount of those gifts would have been exempt (and thus not part of his estate for IHT purposes) from the moment they left his bank account.

 

Trap

 

The Taxman may argue that if you temporarily keep the money you intend to give away in capital investments, e.g. shares etc., then it must be a gift of capital and not income.

 

Tip

 

Make it clear in a letter to the recipient of the gift that you intend to hold the money in the way you see fit until you give it to them. It will then retain its character of income until given away.