EP011 TAX PLANNING FOR INHERITANCE & GIFTING. TAX EFFICIENT STRATEGIES FOR YOUR FAMILY’S FUTURE.

How to gift to your family and pay less inheritance tax.

Abigail Bird is Partner and Head of Legacy at Laurus. She is an expert in Estate Planning, inheritance planning and succession planning.

https://lauruslaw.co.uk/people/abigail-bird

Lisa Conway-Hughes is a Chartered Financial Advisor, a Fellow of the Personal Finance Society and is founder of LCH/Wealth.

Book a one-to-one Financial Diagnosis with LCH/Wealth here:
https://lchwealth.co.uk/lch_wealth_services/

Lisa regularly posts financial information, education and updates on her hugely popular Instagram account:
https://www.instagram.com/misslollymoney

This content is to be used for information and educational purposes only and nothing contained in it is or is intended to be construed as individual financial advice. Financial advice must only be given on an individual basis. If you require legal advice, financial advice or any other expert assistance, you should seek the services of a competent and qualified professional.

If you would like to chat about financial advice please get in touch with abi@lchwealth.co.uk who will arrange a meeting with the right person for you at LCH/Wealth.

Show Transcript

Lisa Conway-Hughes: Welcome to today’s show. We’re talking all today about smart gifting. And I’ve invited Abigail back from Laurus to talk us through this, because it’s something that comes up with clients all the time. So welcome back again.

Abigail Bird: Thanks, Abbi.

Lisa Conway-Hughes: The title for today is Tax Efficient Strategies for Your Family’s Future. And I think that really is. So clients are pulled in two directions. They want to know that their retirement is on track. And then they want some excess money that they can gift to children. And then I think we feel at the moment that the government is after our money when it comes to inheritance tax.

Lisa Conway-Hughes: I had a look. So in 2020, the government took 5.2 billion in inheritance taxes, 2024. That’s jumped to 7 billion. So what can we do to gift to our families without having to mess things up from an inheritance tax point of view?

Abigail Bird: I would say number one tip is the earlier start, the better. There are some exemptions that you can apply when you’re doing lifetime gifting. I can touch on a couple of those, but really it’s something there’s no quick fix. Unfortunately for inheritance tax planning, it’s something that’s done well if it’s done over a prolonged period of time.

Lisa Conway-Hughes: You’ve got to be quite brave to give your money early, don’t you?

Abigail Bird: You do. And I think actually coming back to that as well, which obviously Lisa you would be able to talk some more. But the first thing, first and foremost is making sure that financially you’re going to be comfortable for your remaining lifetime. You don’t know what’s around the corner in terms of care home fees, things like that. So it’s worth obviously meeting with a financial advisor, getting a cash flow, modelling that out. Because then as part of that exercise, you’ll be able to see whether you have capacity for gifting. Because first and foremost, look after yourself and enjoy it. Spend the money as well.

Abigail Bird: So do that. And then if you have capacity for gifting, start thinking about the vehicles that you can use and how to give to your family. So a couple of lifetime exemptions, there are the annual exemption. It’s been frozen for however many years. Well, for all the time I’ve been an advisor which is nearly 20 years.

Abigail Bird: That £3,000 rule. It was always that number.

Lisa Conway-Hughes: At least I don’t have to learn new stuff.

Abigail Bird: Exactly, exactly. So as you well know, the first £3,000 per tax year, there’s no what we call seven-year rule for that. It falls outside of your estate immediately. So there’s no inheritance tax implications. And if you haven’t gifted it from the previous tax year, you can go back one tax year as well. So first and foremost, even if you’re just using your annual exemption every year, that’s still £3,000 you’re getting out of your estate. And if you’re a couple, then that’s six, and going back once you can get £12,000 out.

Lisa Conway-Hughes: Exactly, exactly. And then there’s other ones which are even more laughable, I suppose, the small gifts exemption. So currently £250 to an unlimited number of people. A lot of people use it for Christmas gifts or birthday gifts. But just be aware, if you go one penny over the £250, you lose the exemption in its entirety on that gift.

Lisa Conway-Hughes: So what if I gift £250 for a birthday — I’m not this generous, but if I did — and £250 for Christmas?

Abigail Bird: If it’s for the same individual, you can’t use that.

Lisa Conway-Hughes: Small gifts I need to do one to five?

Abigail Bird: Yes, exactly. Yeah. So split that. And again, that’s another example of why it’s so good to start early because you slowly chip away at the taxable side of your estate by using these exemptions.

Abigail Bird: And I think the other rule — so everyone knows, well not everyone, but it’s commonly known — that if you’re going to gift, you need to live seven years, otherwise it falls into your estate. But a lot of people don’t know about gifting out of disposable income.

Lisa Conway-Hughes: Yes.

Abigail Bird: So, an increasingly popular exemption that people are using is known as the normal expenditure out of income exemption. And it’s for those that have surplus income. So if you, on a tax year, look at all your income minus your expenditure, if you do have surplus that you can gift away, there’s no maximum how much you can gift. But it has to be regular. So you have to form a pattern. But that could be weekly, monthly, or it could be annually. So you could wait to the end of the tax year to see how much you’ve got, then gift it. And it just contemplates your own standard of living as well. But yes, because it’s got no upper limit, it’s a really good one for people that have surplus income.

Abigail Bird: And I should say that we made together a free downloadable pack, the Legacy Pack, where you can track these things.

Lisa Conway-Hughes: We did.

Abigail Bird: Yes. So it’s really, really important to document all your gifting because when you pass away, it’s going to be your executors — the people nominated in your will — who’ll be declaring these gifts to HMRC. So having really clear records is really helpful, and you can do it in the Legacy Pack that we’ve put together.

Abigail Bird: Even for that normal expenditure of income, if you can show intention that there was a pattern, but you didn’t live long enough to show the pattern, HMRC will take that into consideration and be helpful. It can just be if you do for whatever reason.

Lisa Conway-Hughes: Downloadable pack for yes you can. It could just be an Excel spreadsheet I assume, or handwritten.

Abigail Bird: Can it be? Yeah, it can be anything. Yeah. What you want: date of gift, amount, reason. Yes, you really need the date, the recipient, the amount and really where it came from. Because also remember, a gift isn’t just cash. It can be a personal item. It could be a business, it could be a car, it could be a property. So you just want it clearly documented. And then you’ll be able to put it into the relevant tax years and then apply the exemptions as well. So yeah, anything in writing is really helpful.

Abigail Bird: There is for the normal expenditure of income specifically, some people find it quite helpful to download the inheritance tax form that the executor would be completing and actually to complete that and leave that with their other important documents. Then they’ve got all the information readily available. And the people sorting out your estate are going to love you. They will love you. They will love you.

Abigail Bird: Honestly, it’s the executors. They have to be satisfied that they’ve captured your whole estate. And when they’re declaring it to HMRC. And if there’s any element of doubt, they need to pay for an unclaimed asset search.

Lisa Conway-Hughes: And I’ve seen people do this.

Abigail Bird: Yes. So an unclaimed asset search is basically a search you can pay for online and it will contact, I think, about 125, maybe even more institutions to identify any dormant accounts. So yes, I would say do that. And then it will avoid seven years worth of bank statements with your executors going through it, trying to identify gifts. It’s a headache. So like you said, your executors will love that. It’s all nicely documented. And the Legacy Pack does encapsulate everything they would need.

Lisa Conway-Hughes: And so let’s say, I gift £100,000 to my grandkids, and I live three years. Yeah. What happens? Well, what happens to those rules? Because it’s not zero when it’s not sorted.

Abigail Bird: First you want to look at two. It depends on the value of the gift. So in your scenario of £100,000, because you’ve died within the seven year period, that sum minus any exemptions we can apply like the annual exemption, the value not the gift itself. The value will come back into your estate for inheritance tax purposes and be re-added into the pot.

Lisa Conway-Hughes: So if I’ve given them something that goes up in value?

Abigail Bird: Then it’s the value at the day of the gift. So if you gifted them something that was £100,000 and then like a piece of land, and then there’s development on it and it went up to £3 million, you’ve crystallised it at that price. That’s £100,000. Okay. There may be a bit of higher value there, but for ease of using figures. So yes, you want to gift things away before there’s a significant increase in value. Definitely.

Abigail Bird: But if you gift away more than the nil rate band allowance, which is currently £325,000, if you gift more than that, the excess over that you may be able to claim taper relief. So the more years you live into that seven year period, the less tax you pay, until it drops off out of your estate after seven years.

Lisa Conway-Hughes: Okay? And if you gifted a joint asset would then £650,000 apply?

Abigail Bird: Yes. Correct. Exactly.

Lisa Conway-Hughes: As a parent there’s different rules on there. So if I was a parent and I gifted money to my kids, can you explain why that’s a bit different?

Abigail Bird: So in your lifetime, if they are still minors there is an exemption, the maintenance exemption. So you can make gifts to your children for their maintenance while they are minors. And I think until they’re out of full-time education as well, that exemption applies. But on death you also get the additional allowance, which is the residence nil rate band allowance. Which if you satisfy certain criteria, effectively giving a property to your children, you get an extra up to £175,000 worth of the estate going to them at 0% tax.

Lisa Conway-Hughes: And the world of trusts. Are they only for the super-rich with their superyachts?

Abigail Bird: I mean, I wish I had a superyacht, but no, they’re not. I mean, don’t get me wrong, wealthy people do use trusts as part of their estate planning to mitigate inheritance tax, and to provide for future generations. But there’s a whole host of other reasons why you may use a trust. It could be to protect someone that’s vulnerable, with additional needs. It could be to safeguard assets in divorce or bankruptcy. And also, with blended families and second marriages, trusts are very common to protect capital for children while providing income for a spouse.

Lisa Conway-Hughes: And let’s say I’m not 90 and I don’t think I’m going to live seven years. Are there any quick fix things I can do?

Abigail Bird: So, the seven year rule is the most common one. But you could, as well as using those exemptions that we mentioned earlier, speak to a financial advisor about certain investments which qualify for business property relief. The survivorship period for that is two years instead of seven. The good thing is you can continue receiving dividends from that investment.

Abigail Bird: One of the most common failures I see in gifting is people giving an asset away but retaining a benefit. HMRC will see through that gift. It’s called a gift with reservation. The seven year clock won’t start until they no longer have the benefit.

Lisa Conway-Hughes: People often think, oh, I’ll just put my house in my kid’s name. That doesn’t work, does it?

Abigail Bird: It doesn’t work. Again, that’s a perfect example of a gift with reservation. If you put children on the title and they don’t live there, you could create worse tax consequences, not only inheritance tax but capital gains tax.

Abigail Bird: You can pay a market rent to continue residing there, but then your children pay income tax on that rental income. So you have to weigh everything carefully. Something good for inheritance tax may trigger capital gains. That’s why professional advice is essential.

Lisa Conway-Hughes: So if we were to summarise it?

Abigail Bird: Start early. Only gift what you know you can afford. Think of yourself first, enjoy the money. Spend it.

Lisa Conway-Hughes: Yes, absolutely. And all estate planning best starts with a well-prepared will and lasting powers of attorney. From there, with financial advisers, solicitors and accountants, you can identify your inheritance tax liability and work back on how best to mitigate it for your family.

Lisa Conway-Hughes: Amazing. Well, thank you for your time and I hope everyone finds that really useful.