Canada Life reported last year that 59% of UK adults don’t have a will. That’s 31 million people. And yet a will is the best way to ensure that your wishes are known and understood.
November is a month of remembrance. If you are starting to think about the legacy you’d like to leave behind, you might consider “giving while living” and gifting to loved ones or even to charity.
Making use of HMRC gifting exemptions while you are alive and leaving a charitable legacy on death can both be incredibly tax-efficient. You’ll be helping loved ones and good causes you care about while lowering your estate’s Inheritance Tax (IHT) liability, as well as – in some cases – the rate of tax payable.
IHT and the importance of having a will
Both the nil-rate band (£325,000) and the residence nil-rate band (£175,000) were frozen in the Spring Budget, until at least 2026. These are the thresholds over which your estate becomes liable to pay IHT at 40%.
As the value of your investments and property rises over the next five years, the chances of reaching these thresholds will increase, causing many people to become liable for IHT.
Putting a will in place allows you to start thinking about your assets and the value of your estate to decide whether an IHT liability will exist on death.
If you think it will, it’s never too early to start planning how you’ll mitigate the impact of a charge on those you leave behind.
You can make distinct types of bequests in your will, leaving money and assets as well as determining when and how the bequest is received. For example, you might leave the proceeds of a house sale to a family member, while also stipulating who will receive those proceeds if the beneficiary predeceases you.
You might also include charity bequests, which can be tax-efficient in two distinct ways. More on which later!
HMRC gifting rules mean that giving gifts to loved ones can also be tax-efficient
Gifts are exempt from IHT as long as you live for seven years after giving the gift. Dying during those seven years will mean that the value of the gift is included in the value of your estate for IHT calculations. It could push you over the threshold, leaving a liability to IHT on a tapering scale depending on how long you survive.
Some HMRC exemptions allow gifts to be made tax-free. Here are five of them:
1. Gifts to your spouse or civil partner
Married couples and civil partners can pass their estate to their spouses when they die without there being any IHT to pay. You can pass your unused tax-free allowance to your surviving spouse or civil partner too.
2. Gifts within your annual exemption
You can gift up to £3,000 a year tax-free, meaning that the gift doesn’t form part of your estate for IHT purposes, even if you die within seven years.
3. Gifts of £250 or less
You can give gifts of up to £250 to as many people as you like within a given tax year (as long as that person hasn’t already received the whole of your £3,000 annual exemption). These gifts might include birthday or Christmas presents, for example.
4. Wedding gifts
You can make a gift to those getting married as long as the gift is made before the wedding, and the wedding takes place. You can gift:
- Up to £5,000 to a child
- Up to £2,500 to a grandchild or great-grandchild
- Up to £1,000 to another relative or friend
5. Gifts from your income
You can make regular payments – into a child’s JISA or pension, for example – as long as you can prove that the gift is made out of your normal expenditure and doesn’t affect your standard of living.
Gifting to charity can be tax-efficient as well as helping a cause you care about
You can also specify an amount of money, a percentage of your estate, or individual items that you would like to give to charity.
Charity gifts are tax-free and could be a fantastic way to lower the value of your estate, possibly even to lower it below the threshold amount and thereby preventing a liability.
Giving more than 10% of the net value of your estate to charity could even reduce the rate of IHT you pay from 40% to 36%.
This means you can support a charity you care about, while also being tax-efficient.
Get in touch
At Fingerprint Financial Planning, our expert financial planners and mortgage advisers are here to assist you, whatever stage of the estate planning process you are at.
Having a will in place is an important first step, after which you can start to think about how gifting and charitable giving could be used to mitigate the impact of an IHT liability.
You might use gifting to lower the value of your estate or use charitable giving to lower the rate of tax payable.
If you would like to discuss any aspect of your estate planning, get in touch by emailing hello@fingerprintfp.co.uk or call 03452 100 100.
Please note
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
