Making gifts in Wills

There are many misconceptions over lifetime gifting. We are often asked, ‘how much can I gift a family member?’

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Making gifts in Wills

We are often asked, ‘how much can I gift a family member?’ Many believe £3,000 is the maximum gift that they can make, however this is not the case.

The sum of £3,000 is known as the annual exemption and this is the amount an individual can give away each year (6 April to 5 April) without it being added to the value of their estate on death. Whilst this is the case, it is a misconception that the limit is £3,000.

First, if the individual has not made any gifts the previous tax year they can backdate this annual exemption for one tax year.

Furthermore, an individual can make gifts larger than £3,000, however if they die within 7 years of making the gift and leave an estate worth more than the Nil Rate Band (NRB), plus any additional threshold available, the excess gift will use up some of the NRB; thus effectively resulting in an IHT liability on the excess.

If the gift is under £325,000 the beneficiary would not pay Inheritance Tax (IHT) on the gift since this will use up the NRB. The other misconception we come across is that the value of the gift reduces on a sliding scale over the 7-year period. This is not strictly true; It is only the value of the ‘tax’ which reduces on a sliding scale.

Example 1

  1. Mr Smith (divorced) makes a gift of £100,000 to his daughter in January 2015
  2. Mr Smith makes a further gift of £100,000 to his son in January 2018
  3. Mr Smith passes away in February 2020 with an estate of £200,000 (no residential property)

IHT Bill- The cumulative total of gifts in the last 7 years is £200,000 which reduces the NRB to £125,000. The NRB is set against the rest of the estate leaving £75,000 on which tax is payable at 40%.

Example 2

  1. Mr Smith (divorced) makes a gift of £200,000 to his daughter in January 2015
  2. Mr Smith makes a further gift of £200,000 to his son in January 2018
  3. Mr Smith passes away in February 2020 with an estate of £200,000 (no residential property)

IHT Bill- The cumulative total of gifts in the last 7 years is £400,000 which reduces the NRB to nil. The gift in 2018 will suffer tax on the excess of £75,000. The estate of £200,000 will suffer tax.

If the gift that tips over the tax threshold is made 3-7 years prior to death then the rate of tax on the tapered according to a sliding scale.

The IHT rules have changed in recent years so if an individual dies on or after 6 April 2017 and their estate is above the basic IHT threshold; the estate may be entitled to an additional threshold before any IHT becomes due. This is the so-called Residence Nil Rate Band (RNRB). This tax-free allowance for 2020-2021 is £175,000.

For later years, the RNRB threshold will go up with inflation based on the Consumer Prices Index (CPI).

By way of an example; a married couple with 2 children, who have a house worth £300,000, they have cash worth £250,000 and investments worth £350,000. They could make a gift to each of their children of £100,000, and assuming their investments and property don’t grow beyond the NRB  (joint £650k), and RNRB (£300k joint) there would be no IHT payable even if they both died within 7 years.

As with many financial matters’ situations can be more complicated depending on individual circumstances. If you are looking for advice in relation to Inheritance Tax speak to a member of our team

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