IHT and Gift Exemptions; Planning Early Pays

Planning your investments early can really make a difference to mitigating Inheritance Tax (IHT). Recent data from the Office for National Statistics reported that HMRC have gathered a record breaking £1.6bn of IHT in the 2016-17 tax year; the highest ever level of IHT paid in a single year.

To mitigate your IHT bill, you may want to consider the use of lifetime gift exemptions; including gifts of up to £3,000 each tax year.

Larger gifts to individuals, or trusts, can be made but you may have to pay IHT on their value if you die within seven years of making them, as they will fall back into the estate for IHT purposes.

The gift exemption for regular gifts made out of spare income is useful for some, if circumstances permit. There is no limit to the size of the gift, but the gifts must not deprive you of the income needed to maintain your usual standard of living. There are rules which apply to this exemption, but if the gifts fall within the rules they are immediately outside of the IHT net, with no seven year survival period attached to the gift.

If you’re a parent or a grandparent you can take active steps in your lifetime to manage your IHT position by making gifts that will provide tangible benefits to your children or grandchildren.

Parents who put money into an account for their children while they are still under 18 will not see any income tax benefits where the income generated is over £100, but investing into a Junior ISA account could overcome this problem. The ISA funds will become immediately available to the child once they turn 18 allowing them spend it on whatever they wish. If you’d like to tie the money up over a longer time frame, you may want to consider contributing towards your child’s pension pot, where the money will be safely tied up until they are in their 50s.

Even before your child starts school, it is possible to set up a pension and make contributions on their behalf. These will be limited to £3,600 gross, (£2,880 net) per tax year. Even so, over the course of 18 years this will amount to £51,840 paid out of your estate; the £2,880 falls nicely in the £3,000 annual exemption for IHT. Let’s put it this way, if the £51,840 was in your taxable estate at death, then the tax man would take £20,736.

As mentioned the gifts out of income is a useful IHT mitigating strategy for some, and the payments can be used to contribute to a discretionary trust arrangement. The trust would hold the monies over the longer term and pay out to the beneficiaries’ accumulated income and/or capital at times when the beneficiary could do with some financial assistance.

For example, giving away £5,000 of spare income every year for 10 years can save £20,000 of IHT on a chargeable death estate. Inheritance Tax planning is a complicated area of taxation and further reliefs are available to
mitigate Inheritance Tax in a number of situations. Your Bellpenny Financial Planner can provide you with advice on your current IHT position and the steps and products available so that you can manage your exposure. If you’d like more information, call 0345 475 7500.