In August the prime minister warned that the Autumn Budget will be "painful" but quite where and how that pain will be inflicted remains to be seen.
Headlines have suggested possible changes to inheritance tax and capital gains tax. Parents and grandparents hoping to pass on hard-earned wealth to future generations need to know how best to organise their affairs.
As IHT is currently payable on death at a rate of 40 per cent on the excess over an initial tax-free amount of £325,000 (the nil-rate band), it makes sense to try to reduce the overall value of your estate by way of lifetime gifts to individuals or to trustees.
Points to consider before gifting
In the lead up to the Budget it may be tempting to try to maximise the amounts gifted, but it is important to consider your own financial security first and work out how much you might need in the future.
A change in your own circumstances may have significant long-term financial implications.
It is equally important to consider also the financial health of the recipient. Once in their hands, the gift forms part of the assets that are potentially vulnerable in the event of their bankruptcy or relationship breakdown. The recipient of a larger gift should also think about making a will if they do not already have one in place.
One further point to be considered is whether you wish to make a gift or a loan. A loan will be an asset of your estate so does not result in any IHT saving, though it may be the better option for other non-tax reasons. If and when it is written off during your lifetime, that will be the date of the gift.
Surplus income gifts
A particularly effective way of making lifetime gifts is to use surplus income. This is known as the ‘normal expenditure out of income exemption’ and, if claimed successfully after you die, no IHT will be payable on the gifts, whatever the amount, and even if made in the seven years preceding your death.
For the claim to succeed, it will need to be shown that the gifts were part of a settled pattern of giving (for example paying school fees for a grandchild); were made out of income (net of income tax) and not out of capital; and that after making the gifts you are left with sufficient wealth to maintain your usual standard of living.
A detailed schedule of income and expenditure will need to be completed and it can save a lot of time and costs after your death if you keep the necessary records for this to hand, or complete the schedule during your lifetime.
Smaller gifts and charitable donations
Some commonly used exemptions allow for smaller gifts to be made without any IHT consequences.
These include multiple lifetime gifts of up to £250 per person during a single tax year. If unused in one tax year the gift cannot be carried forward.
