At Magenta we advocate the use of all legitimate tax allowances to ensure the most efficient use of financial resources.
Many people maximise their ISA and pension allowances where appropriate but how many are NOT using their £3,000 per year gift allowance?
Every year everyone is allowed to give away £3,000 so that they can reduce the value of their estate when they die and so avoid paying 40% in Inheritance Tax (IHT.) The number of people who have to pay IHT increases significantly each year as their wealth increases.
Some people like to give money to their children and/or grandchildren while they are still alive so they can see the benefit it brings– a nice family holiday, purchase of a home or a reduction of debt etc.
Others may prefer to make gifts into Trust so that a larger fund is available either on their death or at a future date, which may allow the beneficiaries to make more significant changes like paying off a mortgage or buying a holiday home etc.
One or two years’ allowances are unlikely to make a major difference, but if we project 10 years into the future, the gifts could add up to £30,000 for an individual and £60,000 for a couple. Assuming a modest level of growth of 3% pa, this pot will now be worth £80,634 and after 20 years will be worth £216,733.
This will always be outside of their estate for IHT calculations and incidentally also outside Local Authority assessment for care fees. For every £10,000 gifted using annual allowances, there will be a saving of £4,000 in IHT. In the above examples, the IHT savings will be £32,253 and £86,693 respectively.
Unfortunately, people who maximise their ISAs INSTEAD of using their annual gift allowances, may be compounding their IHT situation, firstly because ISAs still count as part of their estate and secondly because the value of the estate is likely to increase if the ISAs perform well.
Don’t forget the other small gift allowances too! You can safely make the following gifts, with the knowledge that they are allowable to reduce your estate, within HMRC rules.
- Any gifts made from income you don’t need to support your day to day living.
- £5,000 as a wedding/civil partnership gift if you are a parent of the bride or groom.
- £2,500 as a wedding/civil partnership gift if you are a grandparent or other relative.
- £1,000 as a wedding/civil partnership gift if you are unrelated.
- £250 per annum to as many people as you like as a “small gift”. (Please note that this cannot be combined with any other available exemptions, or used to classify part of a larger gift as exempt.)
The team at Magenta are passionate about helping families to distribute their wealth as they would wish, so if we can help you and yours, please get in touch for a friendly chat.