For many, planning their personal finances for after their death isn’t something they want to think about. As a result people are missing out on the opportunity to take advantage of annual tax exemptions that relate to Inheritance Tax (IHT). By burying your head in the sand, you could miss out on reducing your potential IHT bill by as much as £1,200 every year.
With the end of the tax year fast approaching, people who have more than £325,000 in their individual estates should be taking advantage of the £3,000 annual exemption. This means that each tax year you can ‘gift’ or giveaway £3,000 without any IHT implications. The money is no longer included as part of your estate and won’t be eligible to be taxed at a rate of 40% on your death.
What’s more if you’ve never gifted an amount from your estate, you can backdate it to last year as well. That means you could give away £6,000 before 5 April 2015 to use up your 2013/14 and 2014/15 tax year exemption. Then on the following day, 6 April 2015, you could gift another £3,000 and use up your allowance for 2015/16. Within two days you’ve reduced your taxable estate by £9,000 and saved yourself £3,600 in IHT.
How you decide to split the gift is entirely up to you. You can give the entire £3,000 to one person, or split it between a few people.
You can, of course, make larger gifts than £3,000 every year but these won’t ‘drop out’ of your estate unless you survive for seven years after making them – worth thinking about if you’re planning ahead. In addition to (and separate from) the £3,000 annual exemption, you’re also allowed to give away small gifts of less than £250, unlimited times in the tax year as long as it is not to the same individual (and not the same person that you have given the £3,000 to).
There are other IHT exemptions that you can make use of that are not limited to any specific tax year. These include regular gifts made out of your weekly, monthly or annual income and gifts made on the occasion of a relative’s marriage. The regulations and amounts are different in each scenario, so check with your adviser to make sure that you’re getting the best and most appropriate advice.
The key to wealth planning for after your death is to make it a topic for discussion with your adviser every year and well in advance. But perhaps the most important piece of advice I can give you is to keep a clear, written record of what you have gifted, when and who to. It’s this information that your executors will need as proof of your estate in the event of your death. Don’t be proactive now, and then leave a confusing trail that may result in your estate being over charged and your beneficiaries paying more IHT than they need to.
Act now, before it’s too late.
For further information on reducing your inheritance tax, please contact Justine Clowes on 01625 442141.