Making gifts to reduce your estate – the rules
One of the most common ways of reducing inheritance tax liability is to make gifts to friends and family during your lifetime in the form of cash or assets.
There are specific rules which apply, which limit the amount you can give away which will affect your estate's inheritance tax liability.
You can legitimately give gifts with a value of up to £3,000 in total in each tax year, with this amount being exempt from inheritance tax. Should you not manage to give away the full £3,000 in a tax year, you can carry forward any unused part to the next tax year. However, it must then be used in that year or the exemption will become invalid.
In addition to this basic guideline, there are other allowable gifts which are exempt from inheritance tax.
For example, wedding or civil partnership gifts up to the value of £5000 may be given to the happy couple by each set of parents. Grandparents or great grandparents can give up to £2,500 and anyone else can give up to £1000.To qualify as a legitimate wedding gift, it has to be given either on the big day, or shortly before the ceremony takes place.
Gifts in the form of money or assets up to the value of £250 can be given to anyone in any tax year. This amount cannot be exceeded and this exemption cannot be used to give to the same person who has received other similar gifts from you in the same tax year for the purpose of inheritance tax reduction.
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Research carried out by Invested Wealth and Investment has revealed that around 15% of grandparents have either been asked or have gifted money to help with expenses faced by their grandchildren.
Today’s young adults in their teens and twenties are under increased pressure to find funding for their university education and beyond, with money needed for rent, property deposits and buying a car.
Not only that, but almost half of the grandparents interviewed who had gifted money to their grandchildren stated that they had done so in order to help them pay off debts or simply to help out with their day to day living.
The research also revealed that grandparents on average are giving just under £2, 500 to help out, with the most generous grandparents coming from Wales.
In a recent High court case a father’s monetary cash gifts to his two daughters were deemed to be necessary and were not to be classed as part of the deceased’s estate. Normally, such cash gifts given to adult children would form part of the overall estate for valuation and inheritance tax purposes. However, in this case, the deceased chose to move in with one of his daughters, following a cancer diagnosis in 2007. Until that time, his other daughter had been his main carer.
These new living arrangements meant that the daughter’s home needed to renovated and that she needed to give up work to look after her father full-time.
In response, the gentleman sold his home and used the proceeds from the sale to gift both daughters £100,000 each by way of recompense and to fund his care needs.
In cases such as these, the gifts are described as “inter vivos gifts” and do not have “the character of portions”. They are therefore usually omitted from the deceased’s final estate.