Make a difference, use your Annual Gift Exemptions

We regularly talk to clients about making use of IHT exempt gift allowances; have you used yours this, or last, tax year? 

If your estate’s value is above the IHT threshold, it’s likely you’ll have an inheritance tax charge when you pass away. Making gifts to your family and friends can be an effective way of reducing your estate’s IHT liability and benefiting your loved ones. 

You may have some questions that you will need to answer when considering gifts, such as: can I afford the gift, will the recipient be responsible, and will they still be hungry (I don’t want to make life too easy)? 

Once you have answered these questions you then need to consider how you make the gift. An outright gift will remain part of your estate as a Potentially Exempt Transfer for 7 years from the date of the gift and may be subject to an IHT charge depending on the value of your estate on your passing. 

However, each tax year – 6 April to 5 April – you can give away money or possessions free of inheritance tax under the following allowances:- 

Annual exemption 

Each individual may gift capital up to a total of £3,000 per annum. If the allowance has not been used in the preceding year it can be carried forward to the present year provided you use the present year’s allowance first. Therefore, if you have not made any gifts this, or last, tax year under this exemption, you could immediately gift £6,000 free of inheritance tax. 

Gifts out of surplus income 

If you have sufficient income to cover your current living costs, you can make gifts out of your surplus income. The rules provide that a gift is exempt if: 

  1. It was made as part of your normal expenditure and; 
  1. Taking one year with another it was made out of your taxed income and; 
  1. After allowing for all gifts forming part of the normal expenditure you are left with sufficient income to maintain your usual standard of living. 

Small gift allowance 

You can make small gifts of up to £250 outright to any number of individuals each year, provided you have not used another allowance on these individuals. 

Gifts for weddings or civil partnerships 

Each year you can help loved ones celebrate their wedding or civil partnership by giving the following tax-free gifts: 

  • £5,000 to a child 
  • £5,000 to a grandchild or great-grandchild 
  • £1,000 to any other individual 

Lifetime gifts made to provide for a spouse, child or dependent relative would generally be exempt, provided the gift is for the maintenance, education or training of the child up to the age of 18, or until the completion of full-time education. 

Gifts made to UK charities are wholly exempt from inheritance tax whether made during lifetime or at death.  This is also true of gifts to certain political parties, national museums, universities, the national trust and other approved bodies. 

When making gifts, we recommend clients keep a log of what the gift was, the value and the date it was given. This will help the person(s) dealing with your estate in the future. 

Gift making can be an effective method of reducing your IHT liability and providing for your loved ones whilst you’re here to see the benefit and enjoyment of your gift. Should you wish to receive further information or discuss gift making, please do not hesitate to contact your Financial Planner who will be more than happy to discuss this with you. 

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