Passing it on

A simple way to minimise the tax bill your heirs could face after you die is to give away your assets while you’re still alive.

The amount raised from Inheritance tax has been increasing on average by 11% each year since 2009. In 2017-18 the government collected a record £ 5.2bn, largely thanks to rising property prices and strong investment performances.

 

The government introduced an additional allowance in April 2017 to accommodate the rising house prices. It means this tax year 2018/19 you can pass on an extra £ 125,000 tax free if you’re leaving your home to your children or grandchildren. However for a lot of people their estate may still exceed the tax free threshold and therefore should understand the steps to minimise the bill.

 

Seven ways to pass on assets Tax Free:

1. Main allowance

This is £ 3,000 – Each year everyone in the UK can give away this amount of money to one person or split it between several. This means couples can reduce the value of their estate by £ 6,000 each tax year. It can be carried over once which means a couple would be able to make a one-off transfer of up to £ 12,000 if they had missed the year before.

2. Small gifts

As well as the main allowance, you can give away up to £ 250 to an unlimited amount of people each year without it ever being subject to tax. The only rule is this money cannot be given on top of the main £ 3,000.

3. Wedding gifts

You could give away up to £ 5,000 to each of your children when they are getting married. Up to £ 2,500 to grandchildren and up to £ 1,000 to any other couple getting married. If you are giving the money/gift as a couple you can effectively double the amount. To ensure the gift remains tax free you need to make it before the wedding and only if the wedding goes ahead.

4. Gifts for maintenance

If you’re paying to support children who are under the age of 18 or in full-time education, this money will be tax free. This allowance can apply to ex-spouses or elderly dependents as well.

5. Donations to charity

There are no limits on the amount you can give away to charity. Donations will never be liable for Inheritance Tax and if you’re a tax-payer they’ll also be eligible for gift aid.

 

If you leave money to charity or to political parties in your Will this will also reduce your IHT bill levied on your estate. This money will be deducted from your estate before IHT is calculated.

 

If you leave more than 10% of your residual estate to a registered charity any IHT charge you face will fall from 40% to 36%. If you left everything to charity there’d be no IHT to pay.

6. Gifts out of income

Surplus income – probably the least understood gifting rule. This is money you give away from the income you receive from a job, a pension or investments.

 

Certain conditions need to be met for this to be allowed. Firstly, the money must genuinely come from income. You cannot sell or transfer assets. Secondly, it can only be money you would not necessarily need and therefore your standard of living won’t be affect by gifting it away. Thirdly, it must be given regularly. You don’t need to commit to these payments/gifts forever but one-off payments are unlikely to be covered. It is important that there is a pattern so even a lump sum every 2 years would count as regular.

7. Transfers between spouses

Married couples and civil partners can transfer assets between each other without it effecting future IHT bills. When the first partner dies the percentage of their unused tax free allowance will pass to the surviving spouse increasing the amount that spouse can pass on tax free in turn. 

After you have considered these options there are numerous ways that we can offer you a chance to reduce the value of your estate. What is most appropriate will depend on your individual circumstances. If you would like to know more contact us on 0845 680 8910.

INHERITANCE TAX IN NUMBERS

£325,000

The amount you can 
pass on free from
Inheritance Tax

£125,000

The extra tax free
allowance for people 
leaving property to 
descendants in 2018/19

40%

The tax rate charged 
on estates above the 
tax free allowance

10%

The amount of money
you need to leave to
charity for your IHT charge
to fall from 40% to 36%

£5.2 billion

Total inheritance 
tax paid in the 
2017/18 tax year

23,250

Number of estates
on which IHT was
levied in 2014/15

8.1%

The increase in IHT
receipts in 2017/18

Savvy Financial Planning, Hinton Business Park, Tarrant Hinton, Blandford Forum, Dorset, DT11 8JF

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