Avoid Pitfalls When Making Financial Gifts

Making a gift to your family and friends while you are alive can be a good way to reduce the value of
your estate for Inheritance Tax purposes, ensuring those closest to you benefit from a lifetime of
your hard work. Estate and tax planning is a complex area and professional financial advice can help
you avoid several big pitfalls when making a gift.

1. Gifting during your lifetime


Married couples and civil partners are allowed to pass their estate to their spouse tax-free when
they die.  In other words, the surviving spouse can inherit the entire estate without having to pay
Inheritance Tax (IHT). They can also pass on their unused tax-free allowance to their surviving spouse
or civil partner.

For example, if a husband dies and leaves all his estate to his wife, she can take his allowance of
£325,000 and add it to her own tax-free allowance.  However, if the husband’s estate is £300,000
and he left it all to his brother, the wife would only be entitled to the remaining £25,000.

Gifts to an unmarried partner might incur Inheritance Tax, as may the gifting of non-cash assets to
children and family members just before passing away.  What and how much you wish to give your
children or other members of your family is completely up to you.  Put simply, if you live more than
seven years from when you make this gift, your children or family will not have to pay Inheritance
Tax (IHT) on your gift when you die.  However, if do not live for more than seven years after you
have made the gift, they might have to pay some or all the Inheritance Tax.

This means if you are thinking about giving away money or assets to your family and friends to
reduce Inheritance Tax, it is very important you make a record of the gifts.

This will make it easier for the executor of your estate to work out during probate what parts of your
estate are liable for tax.

2. Charitable Donations

To encourage more people to leave money to charity, any cash or physical asset you leave to a
qualifying charitable body, either during your lifetime or in your Will, would be exempt from
Inheritance Tax (IHT).

This can also reduce the rate at which IHT is due from the current rate of 40% down to 36%.  This
reduced rate would only apply if the value gifted to charity amounted to at least 10% of the “net
estate” at the date of death. Potentially saving thousands of pounds.

3. Annual Gifting Allowance

While you are alive, you have a £3,000 ‘gift allowance’ a year.  This is known as your annual
exemption.

This means you can give away assets or cash up to a total of £3,000 in a tax year without it being
added to the value of your estate for Inheritance Tax (IHT) purposes.

Any part of the annual exemption which is not used in the tax year can be carried forward to the
following tax year. It can only be used in the following tax year and cannot be carried over any
further.

Certain gifts do not count towards this annual exemption. As such, no Inheritance Tax is due on
them such as gifts of up to £250 to as many individuals as you want. Although not to anyone who
has already received a gift of your whole £3,000 annual exemption. None of these gifts are subject to
Inheritance Tax.

4. Gifts from your surplus income

If you have enough income to maintain your usual standard of living, you can make gifts from your
surplus income. For example, regularly paying into your child’s savings account, or paying a life
insurance premium for your spouse or civil partner.

To make use of this exemption, it is very important that you keep very good records of these gifts,
otherwise, Inheritance Tax might be due on these gifts when you die.

The rules for this exemption are complex – for example, these gifts must be regular, so you need to
be committed to keeping up with making these gifts.

It is best to speak to your adviser first if you want to use this exemption, but it can be used to help
build an effective intergenerational plan.  Grandparents can also use it to pay for things like their
grandchildren’s school fees.

If you would like to discuss gifting in more detail, then why not get in touch and one of our expert
Wealth Strategists will be pleased to discuss your options with you.

Author

Featured articles
How can a book or a small habit change transform your life?
Feel overwhelmed by investment options?
Yorkshire 3 peak Challenge Completed
Case Study: Estate planning – BPR/Trusts/Wills
Transform Your Financial Destiny: Empowerment Through Education
Investing with Purpose
The Three Peaks Challenge
wealth strategies
Financial Planning Across Life’s Stages: Wealth Strategy Tips for the UK
Mastering Change with The Quantum Programme
Learn to enjoy money
Learn To Enjoy Your Money
Get rich schemes
Are Get Rich Schemes Worth It?
Avoid Pitfalls When Making Financial Gifts
Welcome to Damiene
Welcome to Dan!
foresight bank holiday
Foresight Wealth Strategists Bank Holiday.
Mark Hughes - Charity Bike Ride
Mark Hughes helps to raise over £8,000 for local charity
How Safe Is Your Final Salary Pension?
Financial planning
Mastering Financial Planning Techniques with Foresight: Your Path to Empowerment
Spring Budget 2024
Key Dates in March
Vacancy – Receptionist/Admin person
Children Should Be Saving For Themselves
Tax doesn’t need to be Taxing
Recommended Internet Provider
Get to know: Josh Lenihan, Senior Wealth Strategist
Considering Animals and Pets in your Will
Solidus Achievement of Excellence for Estate Planning 2023
Get to know Mike Barnes
Vacancy – IFA Administrator
A week in the life of…Work Experience
A week in the life of…Work Experience
Foresight Shortlisted for Money Marketing Awards 2023
Can I stop my spouse sharing my inheritance on divorce?
2023 Budget Announcement
Professional Advisor Nominations
Webinar: When is the best time to sell my business?
ISA deadlines for 2023
Vacancy – Client Manager
Simple change in your habits can spark massive growth in your life?
Welcome to Thomas
Case Study: John and Linda’s Financial Success Story
Torn Will triggers £800k family dispute

See all blogs by: