This post is discussing lifetime gifting, giving things away whilst you’re still alive. Making gifts during your lifetime is a really good way of planning for inheritance tax. Each year you can give away up to £3,000 free of any inheritance tax liability. In the first year, you make gifts you can give away £6,000. So for a couple, that means that £12,000 can be given away free of inheritance tax ramifications in the first year. You can also give away any excess income as long as it forms a regular pattern of gifting in your estate that doesn’t affect your lifestyle. When you start giving money to family members, to charities, or to organisations, it makes you feel really good, and it starts to chip away at the inheritance tax bill. But sometimes, you need to do more.
Sometimes you need to give away a larger gift, and giving away a large gift gives rise to something called a potentially exempt transfer. If you go over your annual gifting limit, and give away an asset, say worth £20,000, that asset has to be outside of your estate for seven years before it’s outside of your estate for inheritance tax purposes. Also, when you give it away, you can’t reserve a benefit from it. So you can’t give away the family home and continue to live in it, hoping to live seven years so it won’t be in your taxable estate.
You also can’t give away a holiday home, but continue to take free holidays in it. You can’t give away a painting and keep it on your wall, because all of those, for more are called gifts with reservation of benefits. When looking at gifting, there are also other generous allowances for marriage, a marriage of a child or a grandchild, or of any other person. So if you want to reduce your taxable estate by using gifting, the best thing to do is seek some good professional advice. So give us a call.