How will Inheritance Tax affect Christmas cash gifts?

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Ask the expert at Smith & Pinching about Inheritance Tax rules surrounding Christmas cash gifts - Credit: Getty Images/iStockphoto

With Christmas coming up, my wife and I are considering making financial gifts to our six grandchildren, who are all in their early twenties. We have a fairly large estate between us – worth about £1.5 million currently – so need to start giving money away so the family doesn’t have to pay Inheritance Tax when we die. I understand that we need to live for seven years after giving money away for it not to count in our estate so I think we should give large sums now rather than smaller amounts each year. Is this right? We’re in our seventies and in good health.

Matthew Hinchliffe is an Independent Financial Adviser Picture: Smith & Pinching

Matthew Hinchliffe is an Independent Financial Adviser Picture: Smith & Pinching - Credit: Archant

Matthew Hinchliffe of Smith & Pinching responds:

There are two important points to make about gifting and Inheritance Tax (IHT). Firstly, you and your wife each have a set of IHT gift exemptions every year. You can give away a total of £3,000 each per year without it being part of the IHT calculation. You can give the £3,000 to one person or divide it up amongst any number of people. On top of that annual exemption, you can also give up to £250 per person per tax year to any number of people, provided they haven’t received other gifts from you that would take the total over £250.

You can also make wedding gifts up to certain levels depending on your relationship with the recipient. For grandchildren, you can make exempt gifts up to £2,500 – and that’s from each of you. If you have surplus income you can give that away on a regular basis and it will be immediately outside of your estate. These exemptions give you ample opportunity to make gifts over time.

The second point to make is that non-exempt gifts are the first thing to be set against your IHT exemption – known as your Nil Rate Band – so any non-exempt gifts you make in the last seven years of your life won’t themselves be subject to IHT unless their total value exceeds your Nil Rate Band, but they will use up some or all of the Nil Rate Band available to use against your estate on death.

Depending on your circumstances and the disposition of your estate in your wills, you and your wife could potentially have a combined Nil Rate Band of in the region of £1 million. However, with your joint estate currently over this figure, I strongly recommend that you seek independent financial advice to plan to mitigate a future IHT liability while ensuring that you retain sufficient capital and income to meet your needs throughout a hopefully long life. There are potential solutions such as trusts which might be suitable but it’s important to understand what they mean for you and your heirs.

Any opinions expressed in this article do not constitute advice. They assume the 2020/21 tax year and may be subject to change.

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