During your lifetime, you can organise your affairs in various ways to reduce the impact of Inheritance Tax. Below, we detail a number of means of doing so by giving to others.
If you make a gift to an individual in excess of your personal allowance of £3,000 per year, and die within seven years of making it, then the gift is generally chargeable to Inheritance Tax. For example, a grandparent paying their grandchildren's school fees at a rate of £30,000 per year, who then dies within three years of making the gift, could in those three years have an Inheritance Tax liability of £36,000 on death on the £90,000 gifted.
However, if this arrangement had been structured differently then significant Inheritance Tax savings would have been made. This could have been done by paying some or all of the school fees as gifts out of excess income, which would remove that element from Inheritance Tax. To ensure that HMRC do not question the gift, it is important that the payments are regular, made from excess income, and well documented.
While some Inheritance Tax planning involves gifting capital to family or trusts where you cannot benefit from that capital in the future, there are also forms of Inheritance Tax planning that allow you to retain the income and possibly even the capital.
However, such options may not be suitable for all individuals and, as we all have different circumstances, a personal review is always needed to ensure gifts to others are tax-efficient and that a tax-efficient estate remains on your death. Your financial security is always paramount as, whilst giving away money will reduce the size of your taxable estate, it may not leave enough to fund your existing lifestyle.
A recommended approach is to first decide what is to be achieved and then consider, with the help of an adviser, whether it can be done in a tax-efficient manner.
There are numerous reliefs and exemptions from Inheritance Tax, each of which may be helpful in reducing the tax liability in a particular personal situation.