Under Inheritance Tax rules each individual is allowed generally to give away up to £3,000 a year without it having any Inheritance Tax implications (often referred to as your ‘Annual Allowance’). For a married couple this means that they can give away £6,000 each year.
If you did not give away anything in the previous tax year you can even carry last year’s allowance forward into this tax year. So if, as a couple, you had made no gifts in the previous tax year and you wanted to pass some money to your children to save Inheritance Tax , you could give up to £12,000 away, instantly saving your estate as much as £4,800 of tax!
If you then continued to make these gifts of £3,000 each per year it is easy to see that this often overlooked tax planning step can soon start to make huge Inheritance Tax savings for your estate! A couple with a combined estate of over £650,000 that utilised all of their allowances in this way by making the maximum gifts over a ten year period before their death could ultimately save their estates over £26,400 of unnecessary Inheritance Tax (ten years of allowances of £3,000 each, plus the missed year carried forwards giving £66,000 of gifts made tax free, rather than taxed at 40%).
This method of tax planning also has the benefit of meaning that you actually get to see your children (or whoever you decide to make the gifts to!) enjoy the money you give to them, rather than it being tinged with sadness after your death.
A further, often forgotten about, benefit of making such gifts is that the money then grows in the hands of the recipient, rather than you. If you gave away £3,000 now, it could grow to be worth a lot more if carefully invested by the recipient, but the cost to your estate is only the usage of your £3,000 annual allowance. Yet if you kept the £3,000, and it grew through investment, the actual amount would be more (and therefore a larger tax bill!) by the time you died and left the money under your estate.
The gift does not even necessarily need to be to the same individual each year, or to an individual at all! If you did not want the recipient to actually have access to the money (such as if they are still young) you could set up a Trust Fund to receive your annual gift each year. [link to Trusts section please!]
If you intend to start giving away money in this way it is important to keep good records and this is something we would be delighted to discuss with you as part of making or reviewing your Wills.