Inheritance tax: How grandparents could lower bills by gifting to grandchildren – act now

Owen Jones says that inheritance should be taxed

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Inheritance tax (IHT) receipts have risen again as the overall tax take for HMRC between April to November 2021 was £448.1billion, £106.8billion higher than the same period in 2020. Julia Rosenbloom, a tax partner at Smith & Williamson, commented on these figures and broke down what people can do to reduce their IHT costs.

She said: “The latest reported year-on-year rise in IHT collections is an early Christmas present for the Chancellor who needs to do everything he can at the moment to sure up the country’s finances while the impact of the Omicron variant of Covid-19 remains unknown.

“As if the need to pay for the ambitious spending commitments announced in the last Budget isn’t enough, the threat of Omicron could require the Treasury to find more money for compensating businesses if there is a need to shut down parts of the economy to slow the spread of the virus, and tax receipts could therefore be vital in the months ahead.”

Ms Rosenbloom noted as uncertainty surrounding Omicron persists, Mr Sunak could be tempted to consider increasing personal taxes in the next Budget, which could include IHT.

While the date of the next Budget has not been confirmed, it could come as early as Spring 2022.

With this in mind, people should “continue to carefully consider their tax planning and make the most of current allowances before any further possible changes are introduced”.

As Christmas approaches, some people may even be able to factor gifting into their tax planning.

Ms Rosenbloom concluded: “For those who haven’t yet finalised their Christmas shopping, making gifts is an option that may not only help reduce an IHT bill, but if you are giving to a charity you would also be supporting a cause that you really care about.

“Gifting to charities can provide relief which can reduce an individual’s income tax liability. Gifts to qualifying charities are also exempt from inheritance tax and if an individual leaves broadly 10 percent of their estate to charity in their Will, their estate would only suffer a 36 percent inheritance tax rate, rather than the usual 40 percent.

“Those feeling particularly generous could even consider setting up their own charitable trust, claiming appropriate tax reliefs so that as much as possible goes into the pockets of the charities.”

While gifting to charities can reduce one’s bill, it is also possible to gift money and assets away to family members while lowering the levy.

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Stevie Heafford, Partner at accountancy firm HW Fisher, warned IHT can “cost family and friends thousands when a loved one passes away” and as such, he reiterated the importance of planning early.

Chief among the options is making gifts during one’s lifetime.

Mr Heafford explained: “The donor needs to survive for seven years in order for the gift to fall out of [the IHT] charge (there is a tapering of the tax rate after three).

“Make sure you are aware of the potential tax rules on making these gifts:

  • There is a £3,000 annual exemption – if unused it can be carried forward for a year (to give £6,000 the following year).
  • Gifts out of surplus income are not chargeable to IHT – you have to be able to prove they are not out of capital.
  • Small gifts of £250 per person are exempt.
  • Gifts into trust are chargeable lifetime transfers (20 percent) but you have the nil rate band of £325,000.
  • Don’t forget that gifts of chargeable assets (e.g. property, shares etc) may have capital gains tax consequences.”

IHT is levied only where estates valued over certain amounts are handed down to recipients.

IHT is only paid where a person dies and has an estate valued above £325,000.

Where IHT is due, it will be levied at 40 percent on the parts of the estate valued over the £325,000 threshold.

So, for instance, if an estate is valued at £400,000, 40 percent would typically be charged on £75,000 worth of the assets.

It should be noted if a person’s estate value is below the threshold, it will still need to be reported to HMRC.

If a person gives away their home to their children or grandchildren, their IHT threshold can be increased to £500,000.

Where a person is married or in a civil partnership and their estate is worth less than the threshold, any unused threshold can be added to a partner’s threshold when they die. This means their threshold can be as much as £1million.

Full details on IHT rules can be found on the Government’s website and impartial guidance can be sought from the likes of Citizens Advice and Money Helper.

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