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The nine golden gift rules that will save your family a FORTUNE - and how to pass on money tax free: LUCY EVANS reveals how to Beat The Budget By Lucy Evans Updated: 01:49, 31 October 2024 e-mail View comments Grieving families will pay billions more in inheritance tax over the next five years after Chancellor Rachel Reeves launched a three-pronged raid on bequeathed estates. Inheritance tax is already rich pickings for the Treasury – families were forced to pay as much as £4.3 billion in the six months to September alone – up by £400 million on the same period last year.
But new measures announced in the Budget yesterday mean that families will pay an additional £2.3 billion in inheritance tax by 2030. The Chancellor froze the amount that individuals can pass on tax-free at £325,000 until 2030, dragging even more middle-class families into the tax net.
This allowance – known as the nil-rate band – has remained unchanged since 2009. Families passing on businesses and farms to the next generation will also face higher inheritance tax bills. In her Budget, Chancellor Rachel Reeves froze the amount that individuals can pass on tax-free at £325,000 until 2030, dragging even more middle-class families into the tax net At the moment, there are exemptions in the form of Agricultural Property Relief (APR) and Business Property Relief (BPR), which allow families to pass on businesses and farms without paying inheritance tax.
But from April 2026, the exemption will not apply on assets worth more than £1 million and so inheritance tax will be payable. However, inheritance tax will be charged at a 50 pc discount, so instead of the usual rate of 40 pc applying, families will pay a rate of 20 pc. And most punishingly, pensions will also fall within the IHT trap from April 2027.
But despite these changes there are a number of tricks to reduce inheritance tax bills that the Chancellor left untouched. As inheritance tax bills rise, these are set to become even more valuable for passing on a carefully built legacy to loved ones. 1.
Pass on your family home tax-free You can currently pass on up to £325,000 after death free of inheritance tax – and couples who are married or in civil partnerships can pass on a combined £650,000. Everything over this allowance is taxed at a flat rate of 40 pc. But those leaving a property to a direct descendant – such as children or grandchildren – get an extra allowance of £175,000 each, known as the residence nil-rate band, meaning £500,000 is tax-free.
That means an easy way to prevent a huge tax bill after death is to give your home to your children. Ms Reeves was previously disdainful of the extra property allowance, which was announced in 2015 by then Chancellor George Osborne, calling it ‘iniquitous’ and ‘ill-conceived’. But she left the trick untouched in her maiden Budget.
This means a couple who are married or in a civil partnership can pass on a family home up to the value of £1million free of inheritance tax. However, if your home is worth more than £2 million, the property allowance is tapered before it is eventually withdrawn at £2.35 million.
You can also use the allowances of previous spouses if they died. This means couples could pass on up to £2 million tax-free if both are widowed and the previous spouses’ allowances wasn’t used. TAX-FREE: Up to £1 million for a couple in a marriage or civil partnership, doubling if they have partners who previously passed away with unused allowances.
2. Make gifts earlier not later Make payments sooner rather than later to lessen the chance that your loved ones will foot a huge 40 pc tax bill Gifts that you give away during your lifetime are free from IHT so long as you survive for seven years after giving them. Die within seven years and they count towards your tax-free allowance of £325,000, so they reduce the amount of your estate that can be passed on without incurring a bill.
Gifts made over your nil-rate band of £325,000 benefit could benefit from taper relief. The closer to the full seven years you survive, the less tax your beneficiaries need to pay. For a payment made in the last three years before death, the full 40 pc is levied.
But any gifts made four to five years ago face a 24 pc charge, while those made five to six years before your death have a 16 pc IHT rate. Those given six to seven years ago are charged at 8 pc. Make payments sooner rather than later to lessen the chance that your loved ones will foot a huge 40 pc tax bill.
TAX-FREE: No limit on making gifts seven or more years before your death. 3. Use up all gift allowances Everyone gets a £3,000 annual gift allowance, which is exempt from their estate.
Plus, if you didn’t use this year’s allowance you can carry it forward to the next tax year, but it can’t be carried forward any further. Read More DAN HODGES: This Budget was crude, old-fashioned class politics..
. which is bad news for the Tories This means a couple could give away up to £12,000 completely free of IHT in one tax year. The seven-year rule does not apply here, so if you die within that period of making these gifts there is still no IHT payable.
You can also give away an unlimited number of small gifts up to £250, so long as you haven’t used another IHT allowance on the same recipient. Another nifty trick to reduce the tax bill on your estate is to make a tax-free gift to someone getting married or entering a civil partnership. You can give £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else.
But these gifts need to be made ‘in consideration of’ a marriage or civil partnership so payments must be made just before it takes place and not after. TAX-FREE: £3,000 a year, with one year roll-over, unlimited £250 and gifts as much as £5,000 in consideration of marriage. 4.
Be generous to charities Gifts made to charities in your will – whether that’s a fixed amount, an item or whatever is left after all other gifts have been made – are free of inheritance tax. Plus, you can cut the IHT payable on your estate from 40 pc to 36 pc by giving to charity. But you must leave at least 10 pc of your net estate – the part that attracts inheritance tax – to charity in your will to benefit from a lowered rate.
It is best to seek expert advice if you are looking to make use of this rule. TAX-FREE: No limit – and the IHT rate levied on your estate could be reduced by 4 percentage points. 5.
Use a trust for more control Trusts allow you to give away money during your lifetime, but to retain some control over it. They can be a good way to pass money to children or grandchildren if you are worried about how they might spend it. Trusts are a legal arrangement where you can hold assets such as cash or investments that are put aside for someone else, for instance, your children or grandchildren.
Assets held in trust are considered as not belonging to you so, if they are set up correctly, they shouldn’t count as part of your estate when calculating if any inheritance tax is due. But beware that any cash you give away in a trust will still class as a gift and so you’ll need to wait seven years for it to pass out of your estate. Trusts are a legal arrangement where you can hold assets such as cash or investments that are put aside for someone else, for instance, your children or grandchildren Plus, there is typically an immediate charge of 20 pc on gifts made into a trust in excess of the nil-rate band.
The trust is looked after by trustees, who are legally responsible for managing the assets for the person or people who will ultimately benefit from them. When you set up a trust, you decide the rules. For example, you may decide that beneficiaries can only access the assets once they reach the age of 18 or 25.
Trusts vary in complexity, but even the simplest require professional help from a financial planner or lawyer to set up. There are a number of different types of trust and tax rules vary depending on which you choose. TAX-FREE: Assets given away in trusts after seven years.
6. Put life policy into a trust A whole-of-life policy could a be a useful planning tool if your family anticipates an IHT bill on your death. These pay out to your loved ones when you die but if they are placed correctly into a trust they are treated as if they are not part of your estate and therefore free of inheritance tax.
You can appoint one or more beneficiaries who will be paid the full policy sum when you die. However, this can be a costly planning tool and may come with risks. For example, you may forfeit the cover if you stop paying the premiums at any point.
Once you start paying it, it can be difficult to increase your cover should your IHT liability rise. Seek expert advice before going ahead. TAX-FREE: The sum assured from the policy written into a trust.
7. Make a deed of variation When someone dies, their beneficiaries can change their will using a deed of variation. They must be made within two years of the death.
This is often used, for example, when someone leaves their estate to their children but the children decide that they would rather it passed straight to the grandchildren of the deceased instead, skipping a generation. Such a measure could reduce the IHT payable. For example, if someone inherits £100,000 and they want to gift it to their children or grandchildren, if they die within seven years, that gift would count as part of their estate and trigger a potential tax bill if they have already used up their own nil-rate band.
However, if they use a deed of variation to redirect the £100,000 inheritance straight to their children, they could avoid a possible tax bill. In this case, a potential bill of up to £40,000 could be avoided. A deed of variation can’t be used to change the executor of an estate or change other people’s inheritance without their consent.
TAX-FREE: The amount redirected to children could possibly be tax-free. It’s best to speak to a financial planner. 8.
Give gifts out of spare income This is one of the most generous allowances for passing on money to loved ones. Take a look at our article on how to do it . 9.
Hand over part of a buy-to-let If you own a buy-to-let property you can hand it over to your children during your lifetime and still benefit from the income. What you do is hand over most – but not all – of the value of the property to your children. If you own a buy-to-let property you can hand it over to your children during your lifetime and still benefit from the income In effect you are forming a property partnership with them.
For example, you could give them 90 pc and hold on to 10 pc yourself. That 90 pc that you have gifted falls out of your estate for inheritance tax purposes if you survive for a further seven years. The benefit of retaining part of the value of the property is that you can continue to receive part of the rental income.
The proportion that you receive does not have to be in line with the proportion of the property that you own. That means, for example, that you could choose to receive 90 pc of the rental income – even if you own just 10 pc of the property – and the children can have the remaining 10 pc of the income. This can be useful if you still need the income in your old age, but you are worried about inheritance tax implications in the future.
Beware falling into a paperwork trap IHT and gifting Make sure you’ve got enough to live on before giving wealth away – and of course anything you choose to spend isn’t liable for inheritance tax. Of course, should you want to leave behind a generous legacy for your loved ones, you can do this by leaving as little IHT liability as possible. However, before you gift any of your hardearned money that you’ve built up in your lifetime, you must ensure you have enough saved for a decent retirement – which could be as long as 30 years.
Spending increases in later life due to care costs and it is crucial to factor in any healthcare needs of the future. Huge swathes of retirees already find they do not have enough income to allow them a comfortable retirement. A single person who owns their own home needs more than £43,000 for a comfortable retirement this year, according to calculations by the Pension and Lifetime Savings Association (PLSA).
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keep good records If you are making use of gifting allowances and other IHT reliefs you need to keep good records of lifetime gifts you have made. This is not only useful to prove to the taxman the gifts made, and when, but to give your executors an easier experience as otherwise they will need to trawl through records and hunt down bank statements to find out infact-box text Share or comment on this article: The nine golden gift rules that will save your family a FORTUNE - and how to pass on money tax free: LUCY EVANS reveals how to Beat The Budget e-mail Add comment Some links in this article may be affiliate links. If you click on them we may earn a small commission.
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