Know the Exemptions
There are plenty of exemptions which allow you to make gifts with no tax to pay at all, ever. There’s the small gifts exemption, where you can make as many gifts of £250 to different people as you wish.
There’s the annual exemption where you can make a £3,000 gift each year to one person or divide that £3,000 gift between two or more people. You can even carry forward last year’s £3,000 exemption if you didn’t use it last year.
There’s a special marriage exemption of £1,000 to someone getting married or having a civil partnership ceremony. That figure rises to £2,500 if the person getting married is your grandchild or great-grandchild and £5,000 if it’s your child getting wed. You can give whatever you want to charities or political parties with no limit. Little bit self-serving that, by the pollies, dontcha think?!
And you can give any amount under the regular gifts from income exemption, as long as a) it is regular, for which read at least annually, b) it comes from income, so you can’t dip into capital to make this gift and c) it doesn’t affect your standard of living. I get asked periodically about how will the HMRC know that you’ve given gifts? Do they track your bank account or something?
Nope, the system works on honesty. Self-assessment works because they expect you to tell the truth while also reserving the right to investigate you. Your executors will have to sign that they’ve done everything correctly, so unless they want to perjure themselves and end up in prison, it’s probably best not to risk ‘forgetting’ to mention the £250k gift you gave them the week before you died.
Four Ways to Reduce Your IHT Bill
There are four ways to reduce your inheritance tax bill. Remember these and see which ones might work for you:
1) Spend the stuff – don’t buy things that appreciate like classic cars or houses. But blow your money on experiences which have no value after they’re lived. Fly first class or stay in the Ritz. That’s what you worked for after all!
2) Give it away – see above. This is actually even more fun than spending it, if the experiences of most of my clients are anything to go by.
3) Insure the liability – You can take out life insurance to pay the IHT bill. Life insurance can be costly, but it might be worth it. You’ll have to do a value calculation comparing the likely premiums you’ll pay for the rest of your life versus the likely IHT bill. Just be sure to put the life insurance policy in trust. Again, seek advice.
4) Invest to take advantage of Business Relief – I have a nagging feeling the chancellor might do something about this in the 2021 March budget, but currently there are investments which mean that you retain access to the capital should you need it, but if you don’t need it and you still hold the investments at the date of death, then as long as you’ve held them for at least two years, they are inheritance tax free. Man, that was a long sentence!
I don’t like many of these investments as they’re contrived and could be challenged, so tread very carefully here. Spend it, give it away, insure your liability to tax and invest for business relief. You do have options for reducing your tax bill. The biggest issue for most people is that they leave it too late. They’re too old to make gifts and live seven years. They’re too old to fly first call because all they want to do is stay at home and they can’t get life insurance.
ACTION POINT: Plan early but don’t jeopardise your standard of living just to pay tax. I mean, it’s your life and your money, but I’d rather pay tax down the line while enjoying life now, rather than spending what time I have left worrying about tax I’ll pay when I’m dead. But that might just be me….
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