Don’t look a gift horse in the mouth is one of those strange expressions that my grandparents used when I was young… probably when my facial expression failed to cover my real thoughts on receiving a ‘practical’ birthday present. Showing gratitude for a gift, however you really feel, is a skill we all learn. But what about an unexpectedly generous gift – surely there can’t be any drawbacks to receiving a large sum of money?
Imagine your Grandpa winning the lottery – the full £4 million jackpot – and he kindly divided up the winnings between his 4 grandchildren! You and your siblings could be faced with a tax demand from HMRC for £1,200,000 if he died a couple of years later. How can this happen?
Inheritance tax is due on any estate valued at more than £325,000. In the example above your relative died within 7 years of their generous lifetime gift, so the gift still forms part of their estate. Tax at 40% is payable on anything over the lifetime allowance. There’s a sliding scale, called taper relief, that applies to gifts given within 3 and 7 years before death.
You can give as much as you like to your spouse or civil partner as long as they are a permanent resident in the UK. There are other allowances for gifts – you can find out more here: Lifetime gifting allowances
HMRC’s rules do not allow giving away your wealth shortly before death to avoid inheritance tax. But there are ways of minimising the effect of inheritance tax if your estate is likely to be worth more than the £325,000 threshold. Anything passed to a husband, wife, civil partner, charity or political party is free of tax. Anything gifted more than 7 years before you die is also exempt but only if it is a genuine gift. If you give your home to your children but carry on living it this is called a gift with a reservation of benefit, and the full value will be included in the calculation. There other potentially catastrophic and expensive downsides to gifting your home to your children. For example, if your son or daughter owns part of your home and gets divorced, your home will form part of the divorce settlement and you could be forced to find somewhere else to live. Your children will also have to pay Capital Gains Tax on any increase in value when they sell, and there are additional Stamp Duty Land Tax costs to consider too.
It’s never too early to start estate planning. True enough that you won’t be around to pay the bill yourself, but you’ve worked hard for your wealth so shouldn’t you choose who benefits from it?
Get in touch to chat through your options.