"Something that many clients are not aware of is the fact they can also make tax-free gifts out of their income as part of their normal expenditure"
On the one hand, millions of people have found themselves either out of work or on a lower income because of the coronavirus, on the other, many whose incomes haven’t been impacted – particularly older generations on pension incomes - are actually better off than before the crisis as a result of spending less under the restrictions.
As a result, many of my clients have said they are keen to offer financial support to family or charities whose finances have been hit by the crisis, especially as we come into the festive season. And, passing on wealth to children and grandchildren now, when they need it, rather than as an inheritance, certainly makes a lot of sense, especially when you consider that those in their 30s and early 40s now will be 64 before they inherit their parent’s wealth.
So, what advice can you give to clients looking to gift this year but also mitigate their IHT?
Annual gift allowance
Make sure you speak to your clients about their gift allowance – they can gift up to £3,000 each tax year (6 April to 5 April) without any Inheritance Tax (IHT) implications and if they don’t use the full £3,000, they can carry forward for one year, which could mean they are able to gift a significant amount, socially if they are a couple. For example, a couple who didn’t use their annual gift allowance last year, are able to gift up to £12,000 to one family member using their annual gift allowances.
Small gifts exemption
On top of the annual gift allowances, your clients can make tax-free gifts of up to £250 to any number of people in the same tax year. But you must remember to highlight the fact that they cannot give these small tax-free cash gifts to anyone who has already received all or part of their £3,000 annual exemption limit.
Gifts from normal expenditure out of income
Something that many clients are not aware of is the fact they can also make tax-free gifts out of their income as part of their normal expenditure as long as the following three conditions are met:
1. it must be out of income, not out of capital,
2. it must be a regular gift,
3. it must not reduce your standard of living.
So, for example, if you have a client who is retired and their income from pensions is, say, £30,000 per annum and their normal expenditure is £25,000 per annum you can tell them they could gift £5,000 to someone and this would be immediately outside of their estate for IHT purposes. This can be a great option if you have clients looking to regularly support family.
Gifting to charity – assets are worth considering for clients looking to make a large donation
Charities have also been hit hard this year, with recent research warning that one in ten charities will close within a year as a result of the pandemic.
Many clients have come to me asking the best way to gift to charities and I have advised on a couple of different options whereby the gifts will be immediately outside of their estate from an IHT perspective.
Gift donations are a well-known way of gifting tax efficiently – not only can the charity claim an additional 25p for every £1 donated from HM Revenue & Customs (HMRC), but clients who are higher or additional rate tax payers can also claim relief.
But an area that is not as well-known which is worth talking to clients about – especially if they are considering a large donation – is gifting assets, i.e shares or land. This is relieved in a different way to monetary donations because, instead of extending the tax rate bands, the market value of the asset is simply deducted from total taxable income. With cash donations, tax is paid at lower rates, whereas gifting assets can remove the charge to tax altogether.
