Libby Holding: ‘Tis the season for estate planning

As Christmas approaches, most of those celebrating will have finished their shopping and have all their presents wrapped and ready under the tree by now. However, writes Libby Holding, clients may not be aware of the ways in which additional gifts at this time of year and, in some cases, all year round, can help with their estate planning for IHT

Many people are aware of the general rule that you must survive for seven years after bestowing a financial gift in order for it to be exempt from IHT. Generally, after seven years the value of the gift is then outside your estate for IHT purposes and would not be included in calculations for IHT on your death.

There are, however, some exemptions to this rule, so if you have a client who wishes to give money to a relative this Christmas – or any other time of year for that matter – it’s important to be aware of how this can help from an inheritance tax planning perspective.

Gifts to spouses, civil partners, charities, and qualifying political parties are always exempt from IHT charges, regardless of when they are made, but gifts to other recipients may be liable to IHT if they exceed an individual’s allowances or are not ‘exempted gifts’.

Any gifts made from your normal income can be given for occasions such as Christmas and birthdays tax-free. Naturally, the value of these gifts will vary from person to person, depending upon their own level of income and personal circumstances.

Other small cash gifts are covered by the ‘small gifts exemption’, which allows as many gifts of up to £250 to separate individuals to be made as a person might wish, and these gifts will all be exempt from IHT (as long as they are not using another exemption to gift to that person as well).

This could be useful if a person has a large extended family, for example, or many grandchildren and great-grandchildren, who could all receive a small gift within the £250 allowance every year. This would then help to reduce the overall value of the estate of the person who is making the gift and, in turn, reduce the IHT due on their death.

In addition to this, all taxpayers can take advantage of an IHT gift allowance of £3,000 per tax year, which will immediately fall out of their estate for IHT purposes. This sum can be split between any number of recipients and rolled over, for one year only, if it is unused.

Again, if this gift allowance is used each year, it can reduce the IHT due on death. For a couple, this will reduce their joint estate by £6,000 per year, meaning an IHT tax saving of £2,400 per year, which can soon add up if this is planned well in advance.

Another tax efficient option to consider is the ability to give away an unlimited amount of ‘surplus income’ tax free. This is income that you do not need to maintain your own standard of living and you will have to demonstrate to HMRC that your quality of life is not affected by such gifting.

The gifts must be ‘normal expenditure’ for the person making them, and should form a pattern of regular spending, so one-off gifts will not usually qualify for this tax relief. This can be a useful method of keeping an estate below taxable thresholds, but these rules can be complex.

When making gifts, it is important to keep proper records, as it is vital that executors have access to this information when administering a deceased person’s estate. Regular gifts out of income, in particular, will need to be supported by detailed records of the donor’s income and outgoings, so that executors can show that gifts were indeed made out of surplus income (and not capital) and did not compromise the donor’s lifestyle.

Libby Holding is legal services director at APS Legal & Associates – part of The SimplyBiz Group