YOUR MONEY Inheritance tax planning – Lifetime gifts

careful inheritance tax (iht) planning is all about passing as much of your estate as possible to your loved ones rather than to hmrc it is also about ensuring you have enough funds available to you during retirement to provide the standard of living you require currently, you can leave up to £325,000 tax free to your beneficiaries. this is known as your nil rate band (nrB).an additional residence nil rate band (rnrB), worth £175,000, is available if there is residential property held at death which has been your main point of residence at some stage.

rnrB only applies when the property is left to your direct descendants: i.e children, grandchildren, great-grandchildren also, there are downsizing provisions in the legislation that may preserve the rnrB if, for example, you have had to sell your home to go into care your nrB and, if applicable rnrB, allowances can be transferred to your surviving partner on your death.as such, they will be able to pass on up to £1,000,000 tax free, provided the estate includes property valued at £350,000 or more which is being left to your descendants.

and, there are ways available to help reduce the amount of iht your family will have to pay after you have passed.an important one is for you to make exempted gifts, or lifetime gifts as they are more commonly known, subject to the following rule

The seven year rule a lifetime gift is treated as potentially exempt for iht purposes and will be excluded from your estate, provided you survive seven years from the date you make the gift. taper relief is available where you survive at least three years, but this is only available to reduce the effective tax rate charged.as most gifts will be less than the nil rate band, there would be no tax on the gift, and therefore, no taper relief.this will simply result in a reduction in the available nil rate band to set off against the rest of the estate.

How does tapered inheritance tax relief work?

% tax payable between gift and death:

40% if less than 3 years

32% from 3 to 4 years

24% from 4 to 5 years

16% from 5 to 6 years

8% for 6 to 7 years

0% for 7 or more years it should be remembered that the taper relief applies only to the tax payable and not the value of the gift.

Lifetime gifts

By paul underwood, director

there are several gift exemptions that can also be used: Annual exemption you can gift up to £3,000 a year which will be exempt from your estate you can also carry an unused exemption forward to the next tax year, raising the amount to £6,000 in the next yearyou cannot carry forward any more than one year ' s annual exemption Wedding gifts up to £1,000 per person can be gifted as a wedding or civil ceremony present per person, £2,500 can be gifted to a grandchild and £5,000 to a child Regular gifts out of income provided you are able to maintain your usual standard of living after making the gift the gifts need to be regular and should not deplete your capital more on this below Charitable and political donations gifts to uk registered charities and qualifying political parties are iht tax free

Gifting from surplus income a valuable exemption from iht applies to gifts made from surplus income exactly what is classed as income is crucially important to this rule gifts must be from income and cannot be from capital. income from employment and rental income qualify, as does income from a final salary pension and dividends from investments.amounts generated from the sale of investments or withdrawals from investment bonds do not qualify as income for this purpose a gift is exempt from iht provided each gift can be evidenced as follows:

• that it was made as part of your normal expenditure

• that, taking one year with another, it was made out of your income

• that, after allowing for all gifts forming part of your normal expenditure, you were left with sufficient income to maintain your standard of living a gift must meet all the above conditions to qualify for the exemption. there are no limits as to how much of your surplus income can be gifted away annually any gift must form part of an observable regular pattern, should hmrc decide to audit any records.as such, it is important to keep a clear record of all gifts as the exemption is only claimed on death, this will be helpful to the executors of your estate who will be required to complete an iht 403 form and provide details of all gifts and transfers of assets

Inheritance tax planning can be complicated, and we would urge you to seek expert advice before making any important financial decisions.

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