There is another way though - you can make those gifts to those people whilst you are still alive!
Not only will this make those people very happy - it could also benefit you and your whole estate.
The reason is that making gifts during your life can be an important tool in your tax planning - it could help you reduce or avoid having to pay the taxes that you might otherwise have to pay if you still own those assets on your death, particularly if you live for 7 or more years after you make the lifetime gift.
As with everything connected with tax however, it's not that simple and there are rules, and even you giving property away rather than selling it can lead to tax being payable!
So, can lifetime gifts help you to avoid tax?
There are two taxes to look at - Inheritance Tax, and Capital Gains Tax
A. Inheritance Tax
When you die, the tax man values everything in your estate, because he would like to tax it (by way of Inheritance Tax) as much as possible.
He can't get his hands on the first £325,000 (that is called your Nil Rate Band. In certain circumstances, if you die after your spouse, you can have double that - a Nil Rate Band of £650,000) but everything over your Nil Rate Band gets taxed at 40%.
So, if there are assets in your estate when you die that you could have given away when you were alive, those assets will be hit by a tax of 40% if your estate is valued at over your Nil Rate Band.
You could have avoided some or all of that that tax by giving those assets away before you died. As we mention above though, the tax man has set up rules to stop you avoiding paying him tax by giving everything away before you die. Those rules do however still allow you to reduce or avoid death-time IHT in certain cases by you giving assets away before you die.
So, if you simply give the assets to the beneficiaries while you are alive rather than after you die and you then live for 7 years after you have made that gift, those assets no longer count in your estate when you die and no tax will be payable on them.
That is, when you make the lifetime gift, it is POTENTIALLY exempt from tax, and it becomes ACTUALLY exempt from tax if you are still alive 7 years later.
If you die before the 7 years are up, then tax is payable on the assets you gave away in the same way as it is payable on all your other assets, though of course you still get your Nil Rate Band. If all your assets - including those you gave away during the last 7 years of your life - are no more than your Nil Rate Band, then no tax is payable.
If on your death your assets - including those you gave away in the last 7 years of your life - exceed your Nil Rate Band - then tax will be payable on all your assets, although you will get tax relief on the lifetime gifts that you made on a sliding scale depending on how many years passed between the gift and your death.
In addition to this general rule, there are other rules that can help you -
- You are free to give away assets and money to the value of £3000 per year. Those gifts will immediately fall outside your estate and no tax will be payable on them. (You can also use previous years' £3000 allowances if you haven't already used them)
- You can make as many small gifts as you want to different people - up to £250 each. These will always be tax free
- Giving the property to your spouse or civil partner while you are alive will always be tax free, with no limit on the amount that can be given. Only £55,000 of it will be tax free if your spouse is domiciled abroad
- All gifts to charities and political parties will be tax free
- If someone is about to get married or enter into a Civil Partnership, you can make gifts to them that will not then be included in your estate for tax purposes. The size of tax-free gift you are allowed to make varies according to your relationship with the couple - parents can give £5000, grandparents can give £2500, and anyone else can give up to £1000, without any of them having to pay tax
- IHT is not payable on gifts for the maintenance of a child who is under 18 (or over 18 but in full time education or training) or who is dependent on you because he is physically or mentally disabled. Any gift must be reasonably for his or her needs.
- You can make regular gifts free of IHT provided these are made out of your income rather than out of your capital and provided the gifts leave you with sufficient income to maintain your usual standard of living. Complete records of income and expenditure must be kept if this exemption is claimed.
- If, instead of making the lifetime gift direct to a person, you place it into a trust for them, then SOME Inheritance Tax will be payable immediately. Such lifetime gifts to a trust are taxable at 20% of the value of the gift when the gift is made, on that part of the gift that is over £325,000. If you then die within seven years of placing the gifts into the trust, the gift may be charged at the death rate of 40% (with credit being given for the IHT already paid at 20% during your lifetime, and the same sliding scale as above applies).
B. Capital Gains Tax (CGT)
Capital Gains Tax is the other tax you need to be wary of when you are contemplating giving assets away before you die - you don't want to avoid IHT only to fall into a CGT trap!
CGT is charged where you sell assets but it can also apply where you give assets away during your lifetime.
It is charged on the difference between what you paid for the asset (or the value in March 1982 if it was bought before then) and the value at the date you gave it away. The rate of tax payable on the "gain” will be 18%.
However, you are allowed gains of £10,100 per year without any charge to CGT, and certain types of property are exempt from CGT, such as your car and your main residence - so giving these away while you are alive would not attract CGT.
Any gifts you make to your spouse or civil partner are free from CGT, providing certain conditions apply, and if you make a gift of any asset - apart from cash - to a charity, you won't have to pay CGT.
If you give particular business or agricultural property assets to certain people while you are alive, it may be possible to defer any gain so CGT isn't immediately payable, and if certain business assets are given away reliefs from the usual CGT may also be available.
This may look very complicated - it is. There are opportunities but also pitfalls. We can offer advice on how to make the most of the various tax exemptions and reliefs available. Lifetime giving can be used in conjunction with your Will to help minimise the Inheritance Tax burden on your death.
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