The little known exemption that could save you 40% in tax

Historically, Inheritance Tax Planning (IHT) was sought by just a few clients, but in recent years there has been an increase in clients facing the potential of a IHT liability in the event of their death.

In 2009 the IHT threshold was frozen at £325,000, and the Chancellor Jeremy Hunt has advised it will remain at this level until 2028.

Gifting is one way of mitigating your tax liability

Every adult can gift a maximum £3,000 a year (IHT-free), so a couple could gift £6,000 in total (and utilise last year’s allowances too, if unused).

Individuals can make smaller IHT-free gifts of up to £250 per person, providing the recipient has not benefited from the £3,000 allowance.

Parents can also gift £5,000 to a child on marriage, £2,500 to a grandchild or great-grandchild who is getting married, and £1,000 to a relative or friend.

Any further ‘gifts’ are known as ‘potentially exempt transfers’ and only fully escape IHT if you live for another seven years after making them.

“Something I have been discussing much more with clients in recent years is ‘gifting out of regular income, which can provide immediate IHT relief, saving up to 40% on regular gifts made. This is a little known, but very powerful allowance available to clients who have surplus excess income*” says Paul Gibson, Chartered Financial Planner.

“Due to the increase in the cost of living, we have had more clients ask how they can financially support their children. Some (clients) do not have, or do not wish to gift larger lump sums, but have the ability to make smaller gifts on a regular basis enabling them to help with rising mortgage repayments and rent, university costs or simply saving for younger children whilst potentially making an IHT saving of 40% at the same time” continues Paul.

At Active Chartered Financial Planners we build long term relationships with clients, meeting with them regularly to review their objectives as situations may change. This commitment ensures that clients receive the best possible advice tailored to their specific financial goals and circumstances.

*To qualify, the payments should be in line with the donor’s general outgoings and made on a regular basis e.g. monthly by standing order to the beneficiary and must come out of the taxpayer’s income (not capital); this could be pensions, dividends, interest, rent or salary – without the donor having to compromise their living standards. So, if after making the gifts the donor had to fall back on their savings to get by, HMRC would likely dismiss the claim.

When making regular gifts out of excess income it is important to keep a record of payments made as this information will be needed in future by your personal representatives, after your death in order to make a claim.

The Financial Conduct Authority does not regulate taxation and trust advice

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