How IHT’s Exempt Donations Can Lower Your Estate Tax Bill

9:39 am 3 November 2021

I have a considerable estate worth around £ 1.2million. I am not married and have no children, so there is going to be an inheritance tax bill payable when I die. I would like to give money to my nieces and nephews every year at Christmas, because I can afford it and because it will help drive down the value of my estate. Can I do this or will the tax office penalize me for trying to avoid the tax?

Phil Beck, Independent Financial Advisor at Smith & Pinching, Chartered Financial Planners
– Credit: Smith & Pinching

Phil Beck from Smith and pinch respond :

The IHT is certainly a tax that can be mitigated, at least to some extent, with the right strategies. HM Revenue & Customs (HMRC) allows you to take steps to reduce a potential future Inheritance Tax (IHT) liability and offers you a range of exemptions.

One of the essential elements of an IHT mitigation strategy is IHT-exempt giveaways. You can donate up to £ 3,000 each year without IHT liability. On top of that, you can give up to £ 250 each to any number of people each year, as long as the total you give them in the tax year does not exceed £ 250.

In addition to the annual stipend, you can make IHT-exempt wedding gifts as well as gifts to charities and political parties. If you have excess income, you can use it to make regular donations that will be considered immediately outside your estate as long as they are made regularly and come from excess income – so as not to result in a reduction of your normal standard of living.

Donations in addition to your donation allowances will also be treated as out of your estate once seven years have passed since you made the donation – and potentially up to 14 years before your death if billable lifetime transfers have been made. been carried out.

The amount you can leave in your estate without incurring IHT – known as the Nil Rate Band – is currently £ 325,000 per person. There is another exemption, known as the Residence Nil Rate Band, which only applies when a person leaves their home to their direct descendants. Not having children, you cannot benefit from this additional exemption.

IHT and gift processing is a complex area of ​​planning. I highly recommend that you meet with an independent financial advisor to explore how best to mitigate your future IHT liabilities. There may be other avenues to explore – pension contributions or certain IHT-friendly investments, for example – which will depend on your personal and financial situation.

The opinions expressed in this article do not constitute advice. The value of an investment and the income from it can go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than what you initially invested.

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