As we age or accumulate more wealth, protecting and preserving our assets for future generations becomes increasingly essential. This process, known as Inheritance Tax (IHT) planning, estate planning or intergenerational wealth planning, involves strategically managing your estate to minimise tax liabilities and ensure that your wealth is passed down to your loved ones in the most tax-efficient manner possible.
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Effective planning can significantly impact the financial wellbeing of your heirs, making it crucial to consider various strategies and tools available for safeguarding your estate.<\/p>\n
One common question we receive from clients is whether to gift assets during their lifetime or wait until they have passed away. The answer is more complex and heavily depends on your personal and financial circumstances and objectives. Gifting can provide immediate support to family members and potentially reduce your estate\u2019s size, lowering the IHT burden.<\/p>\n
However, careful consideration must be given to the gifts\u2019 timing, amount and recipients to ensure that they align with your long-term goals and comply with tax regulations. Understanding these nuances is essential in making informed decisions that will benefit you and your loved ones.<\/p>\n
Understanding Inheritance Tax<\/strong> Why do we gift?<\/strong> How much can you gift?<\/strong> The impact of sequencing gifts<\/strong> Potentially Exempt Transfers and their uses<\/strong> Chargeable Lifetime Transfers<\/strong> Complications in gift order<\/strong> HMRC rules on failed PETs<\/strong> Annual Gifting Allowances<\/strong> Small Gifts Allowance<\/strong> THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL, OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.<\/p>\n THE FINANCIAL CONDUCT AUTHORITY DOESN\u2019T REGULATE TRUST PLANNING AND MOST FORMS OF INHERITANCE TAX (IHT) PLANNING. SOME IHT PLANNING SOLUTIONS PUT YOUR MONEY AT RISK, AND YOU MAY GET BACK LESS THAN YOU INVESTED. IHT THRESHOLDS DEPEND ON INDIVIDUAL CIRCUMSTANCES AND THE LAW. TAX AND IHT RULES MAY CHANGE IN THE FUTURE.<\/p>\n","protected":false},"excerpt":{"rendered":" Should you consider estate planning and gifting for future generations? As we age or accumulate more wealth, protecting and preserving our assets for future generations becomes increasingly essential. This process, known as Inheritance Tax (IHT) planning, estate planning or intergenerational wealth planning, involves strategically managing your estate to minimise tax liabilities and ensure that your … Continue reading “Navigating the complexities of inheritance”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"class_list":["post-4842","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/reddotgroup.co.uk\/news\/index.php?rest_route=\/wp\/v2\/posts\/4842","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/reddotgroup.co.uk\/news\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/reddotgroup.co.uk\/news\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/reddotgroup.co.uk\/news\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/reddotgroup.co.uk\/news\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4842"}],"version-history":[{"count":0,"href":"https:\/\/reddotgroup.co.uk\/news\/index.php?rest_route=\/wp\/v2\/posts\/4842\/revisions"}],"wp:attachment":[{"href":"https:\/\/reddotgroup.co.uk\/news\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4842"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/reddotgroup.co.uk\/news\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4842"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/reddotgroup.co.uk\/news\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4842"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
\nWhen you pass away, IHT is potentially payable to HM Revenue & Customs (HMRC). The amount due depends on the estate\u2019s value minus any debts and after all available thresholds have been used. These thresholds are the nil rate band (NRB) and the residence nil rate band (RNRB). At a high level, the NRB is \u00a3325,000, and the RNRB is \u00a3175,000, the latter of which is only available if you leave your home to a direct descendant. The standard rate of IHT due to HMRC on amounts over these thresholds is 40%. This reduces to 36% if at least 10% of your net estate is left to charity.<\/p>\n
\nWe gift for two common reasons: We want to help our family and loved ones now, when they need it, and whilst we can see them enjoy it, as opposed to when we have passed away. This is often called a \u2018living inheritance\u2019. Additionally, we may have a large estate and wish to reduce its value so that our beneficiaries pay less or no IHT when we pass away.<\/p>\n
\nIn short, you can gift away however much you want to whoever you like and whenever you like. If these gifts fall within the \u2018annual gift allowances\u2019 or are made from your regular surplus income, they automatically fall outside your estate for IHT tax purposes. Otherwise, you must survive seven years after making the gift before the gift is excluded from IHT tax calculations.<\/p>\n
\nThe sequencing of gifts can significantly impact the wealth you want to pass on. In addition to the seven-year rule, there is the less well-known 14-year rule. Giving a gift outright to an individual and\/or Absolute\/Bare Trust in excess of the annual allowances is known as making \u2018Potentially Exempt Transfers\u2019 or PETs.<\/p>\n
\nFor example, a common reason for making a PET might be to help a child onto the property ladder. To ensure the gift is outside of your estate for IHT tax purposes, you need to survive seven years from when the gift is made. If the PET is more than the NRB (\u00a3325,000), there is gradual tapering on the excess once you have survived for over 3 years. The longer you survive after making the gift (between 3 and 7 years), the greater the tapering.<\/p>\n
\nShould you settle any money into a relevant property trust, such as a Discretionary Trust, these gifts are known as \u2018Chargeable Lifetime Transfers\u2019 or CLTs. An example of such a settlement might be grandparents wanting to pass money down to their grandchildren. A common reason for this may be that their children already have a large estate, so if they were to inherit any more, it would be unhelpful for their IHT position.<\/p>\n
\nComplications may arise when an individual has passed away and has made both PETs and CLTs. This is because the order of these gifts can result in bringing 14 years\u2019 worth of gifts into the IHT calculation. When considering which gifts are liable to IHT, the gifts are placed in the order they were made, starting with the oldest and moving towards the date of death.<\/p>\n
\nHMRC rules are such that any CLTs made in the seven years before any \u2018failed PETs\u2019 must also be brought into account. If an individual makes a PET and dies within 6 years and 11 months, the PET fails. From the \u2018failed PET\u2019 date, HMRC will look back a further seven years and include any CLTs in their calculation to determine the IHT due on the PET.<\/p>\n
\nUnder current legislation, everyone can gift away \u00a33,000 per year. This is called your \u2018annual exemption\u2019. Any unused allowance can be carried forward to the following tax year; however, it cannot be carried over again. There is also a wedding allowance of varying amounts depending on the relation, which must be made before the wedding, and the wedding must happen: \u00a35,000 to a child, \u00a32,500 to a grandchild, \u00a31,000 to a relative or friend. Wedding gifts can be combined in the same year with the annual exemption.<\/p>\n
\nYou can also make gifts of up to \u00a3250 to as many different people as you like, as long as the person has received more than \u00a3250 from you that tax year.<\/p>\n