Top things to consider when gifting inheritance early

One of the biggest factors to consider when thinking ahead to your financial future, is the burden of inheritance tax. This can have a substantial impact on the wealth you wish to leave to your loved ones, when you pass away.

One option you may want to explore, and potentially a way to minimise the tax, is through gifts. But as with any financial planning, some of the areas can be complex, so let’s take a look at some of things you need to know before you decide to gift your inheritance early.


Do your research

First of all, you should always conduct extensive research before making any important decisions when it comes to your financial future. There are plenty of resources available online, such as blog posts from Close Brothers Asset Management financial planning advice for example, which can inform you of what you need to know and help you optimise your inheritance tax position.

It’s worth remembering that any tax you pay or benefits you are entitled to, will depend on your personal tax position and rules are subject to change.

You should also have a basic understanding of how inheritance tax works, in order to implement an effective strategy for your assets, in the event of your death. If this involves an investment strategy to make the most of your pension, for example, you need to remember that the value of investments can go down as well as up, and you may get back less than you invested.


Learn the basics

In simple terms, inheritance tax is a tax on the estate of someone who has passed away, including assets ranging from savings, investments, real estate, life insurance pay-outs, and personal possessions. Any tax liabilities are deducted from the total value of your estate.

In the UK, there is an inheritance tax allowance, that works as a threshold amount, of which you do not have to pay tax on. This currently stands at £325,000 and applies to every person in the UK. Anything above this threshold is taxed at a rate of 40%, unless this amount is left to your spouse, civil partner, a charity or a community amateur sports club — in which case it will be tax free.

You should therefore consider who you wish to gift your inheritance to early, as giving to a charity for example, could possibly be free of tax. Also, you should calculate the likely value of your estate, as it if it totals below £325,000, then inheritance tax will not apply in the event of your death.

Gifting to your family members

During your lifetime, you can pass on a gift to your children or family members without having to pay inheritance tax. Gifts can include:

  • money
  • household and personal goods, for example, furniture, jewellery or antiques
  • a house, land or buildings
  • stocks and shares listed on the London Stock Exchange
  • unlisted shares you held for less than 2 years before your death

There are certain qualifications in order for your gifts to be effective, one of which is known as the seven-year rule. In simple terms, this means that if you live for more than seven years after you made the gift to your family members, then no inheritance tax is applied to the gift, when you pass away.

If these gifts are given between the three-to-seven-year period before your death, then there is sliding scale of tapered relief. This ranges from a 0% to 32% rate of tax on your gift, depending on the year it was given.

Therefore, you must consider the time frame of gifting your inheritance early. It is also worth making a record of what, who, when and how much you have given, to make it easier for the person executing your will to work out the tax liabilities of your estate.

When planning for your finances in the event of your death, it is best to consult a financial advisor, so that you can explore all the effective options and understand all of the rules, regulations and exemptions.




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