Amid a rush of gift-giving ahead of an expected rise in Inheritance Tax (IHT) in the upcoming October Budget, here are five important things to consider when giving gifts.
Tips for giving gifts ahead of the Budget:
1. No limit on tax-exempt gifts from unused income
Currently, there is no limit on how much you can give in tax-exempt gifts if it comes from your surplus income.
As long as you are giving money away from income you do not need, there is no limit to how much you can give away free of IHT. However, this exemption is subject to various rules and procedures, so it is important to seek professional advice before proceeding.
2. Utilise your tax-free gift allowances
Make sure to use available tax-free gift allowances before giving gifts that could be subject to IHT. Key allowances include:
- Annual exemption: £3,000 per year, which can be carried over for one tax year if unused, allowing a total of £6,000;
- Wedding gifts: £5,000 per child, £2,000 per grandchild, and £1,000 for anyone else; and
- Small gifts: An unlimited number of small gifts up to £250 per person annually – provided no other exemptions have been used for that individual.
3. Keep a record of all your gifts
Properly recording the details of your gifts – such as the recipient, amount, and date – is crucial, and your executers will be grateful one day. Many people fail to do this, which can lead to unnecessary administration and detective work for their executors. Good record keeping can also help ensure that all available exemptions are fully claimed, thus saving time, money and tax.
4. Be mindful of future care needs before gifting
If there is a possibility that you might need significant care in the future, be careful about giving away too many of your assets. If you do not have enough remaining funds to cover care costs, your local authority may be asked to contribute to the cost of your care. If they suspect that you have intentionally transferred assets to avoid care fees – referred to as ‘deliberate deprivation of assets’ – they may evaluate your financial situation as if you still possessed those assets. This could result in the financial burden falling on the recipients of your gifts or your heirs.
5. Be very careful about giving gifts if acting under a Power of Attorney
If you are acting under a Power of Attorney for someone else, such as an elderly family member, your ability to give gifts on their behalf is extremely limited. For substantial gifts, you must obtain permission from the Court of Protection. Failure to do so could result in the court requiring the gift be returned or even revoking your Power of Attorney.
Many people are now rushing to make gifts as they believe that doing so may save tax. However, there are things that can go wrong if giving is done too hastily. Taking professional advice when considering gifting can yield significant benefits, particularly where larger sums are involved.
How TWM can help you
If you are concerned about Inheritance Tax impacting your family, our specialist private client solicitors can help you review and update your Will to safeguard your assets and ensure it reflects your true intentions.
For more information or advice, please contact our Private Client team today for an initial no-obligation consultation.