Reduce your inheritance tax liability and keep control of your money at the same time
Many folks have heard about the 7 year rule for gifting.
This is when you can gift up to £325k in any 7-year period and after that time it will be out of your estate for inheritance tax purposes. After this period, you can then gift a further £325k and, if you survive 7 years again, that amount is out of your estate for inheritance tax purposes also.
There is also a sliding scale of inheritance tax % reduction available, so if you do not survive the full 7 years, there is still a reduction of 8% in years 3-7 (5 x 8 =40), so this presents a good opportunity, with plenty of forward planning, to start the process of inheritance tax mitigation for your beneficiaries as soon as is practical and, if you put the money into a discretionary Trust, and elect yourself as a Trustee with at least one other person, then you can control, through the use of an Expression of Trust Wishes Memorandum combined with Trust Loan Notes, how the money is distributed to the elected beneficiaries. Always remember though that you yourself cannot be a named beneficiary of the Trust because that will be seen as a Gift with a Reservation of Benefit (GROB).
However, there is also another way of reducing inheritance tax on your estate that is often overlooked, which is not subject to the 7-year rule and, can also go into a separate Trust and does not count towards your Lifetime gifting allowance and will subsequently not be considered a Potentially Exempt Transfer.
This is affected by utilising your gifts from regular income allowance.
Gifts must be made on a regular basis and must always be out of surplus income.
This means that in gifting, your standard of living must not be affected – such gifts could be made from pensions or returns on investments or income from rental properties for eaample (not the capital, only the returns that have been taxed at source).
The most important aspect of this gifting strategy is record keeping – be very meticulous about what has been given, to where it has gone, by what medium and from what source.
In addition, everyone has the ability to gift £3000 per year, irrelevant of its source and, the ability to gift £250 each year to an unlimited number of people (so long as they are not beneficiaries of your £3000 allowance) is also allowable, but these gifts need to be absolute direct gifts to the individual concerned, so control through the use of Trusts is not available on these types of gifts.
There is also the ability to add Wedding gifts into the Inheritance tax mitigation mix and the allowances are as follows:
A child of yours can receive £5000;
A Grandchild or Great Grandchild can receive £2500
And
£1000 can be gifted for anyone else’s wedding and again, keep accurate records of these gifts (made preferably by bank transfer so an electronic record will be available).
If you would like to set up a Trust for the purposes of gifting in order to utilise one of the above available strategies, just give us a call FREE on 0800 668 11 64.