“The hardest thing in the world to understand is the income tax.” Albert Einstein
I imagine that if Albert Einstein were alive today he might say the same of our current inheritance tax regime.
UK Inheritance tax can be a minefield and is among the most intricate and arduous in the world.
Whilst pushing many people out of having a taxable estate on death, the new residence nil rate band also increases the complexity of handling the administration for executors.
If you are looking at your financial affairs, you may be wondering how to simplify your estate or indeed, reduce your estate further to ensure that you maximise your benefit. You may wish to take advantage of one or all of the following lifetime gifting allowances.
In any single year, an individual can gift £3,000 tax free. You can also gift £250 to multiple individuals provided they have not already received a gift from you within the last 12 months. This is in addition to gifts you may make in relations to weddings, birthdays and other annual holidays.
Potentially Except Transfers (PETs)
If you gift any amount over the annual exemption of £3,000 you should be aware of the seven year rule.
It is common for a parent to make a gift to a child in order to help them with a deposit for a house. Three years later another child may need financial help with a purchase. This is where you need to be aware of a tax trap.
By making two gifts within seven years, you are opening your estate up to a potential tax burden as the earlier gift will be ‘caught’, even if you pass away seven years after making the first gift.
This will increase the total gift value as both will be used in the calculation when determining the inheritance tax due. Larger gifts over the nil rate band of £325,000 attract inheritance tax if you die within seven years of parting with the money. Any tax that becomes payable may be subject to taper relief or a sliding scale of tax.
This is one of the most misunderstood areas of inheritance tax as the relief can only be applied against any tax due and not the gift made.
Gifts out of normal expenditure
I am often met with surprise when I mention this tax saving method. Provided you keep full annual records of all income and expenditure, it is possible for your executors to make a successful claim that provides an additional relief.
It is always better for you to keep up-to-date records, rather than leave it to your executors to calculate as even expenditure such as food must be accounted for. You should be careful to ensure that you make no capital payments out of any particular year as this will negate the relief. You must also be able to maintain your current standard of living.
It can become incredibly confusing and frustrating when trying to traverse these allowances.
Chancellor Philip Hammond has recognised the difficulties that the general public are finding with the inheritance tax regime and has pressed the Office of Tax Simplification for a review.
Whatever happens, make sure that you have the correct advice and knowledge in order to navigate the obstacles. If you would like to discuss any of the above please call Lindsay Taylor on 023 8057 4304, or click here to visit the Wills, Trusts and Probate team web page.
Before I finish, I would like to leave you with two more quotes:
Wealth consists not in having great possessions, but in having few wants.
Money may not buy happiness, but I’d rather cry in a Jaguar than on a bus.