Rush of gift-giving ahead of expected Budget Inheritance Tax rise – what five key things do your clients need to know?

Amid a rush of gift-giving ahead of an expected rise in Inheritance Tax (IHT) in the Budget at the end of October, TWM Solicitors, the leading private wealth and family law firm, highlights five overlooked but important facts that people should know about giving gifts:

1. There is currently no limit to how much you can give in tax-exempt gifts – provided it comes from your unused income

Gifts given from your built-up savings or other assets will be subject to IHT unless you live for seven more years after giving them, or your total chargeable estate is under the IHT threshold. However, if you are giving money away from income you do not need, there is no limit to how much you can give away free of IHT. This exemption is subject to various rules and procedures that advice should be taken on before proceeding.

2. You should make sure to use all your tax-free gift allowances

There are several different tax-free gift allowances that you should use up before giving gifts that could be liable to IHT. They include:

• ‘Annual exemption’ of £3,000 per year – which carries over to make £6,000 next year if you do not use it;
• Wedding gifts of £5,000 per child and £2,000 per grandchild and £1,000 for anyone else; and
• An unlimited number of small gifts worth £250 per person annually – provided you have not used one of your other gift allowances for that person.

3. You should keep a record of all your gifts – your executors will be grateful one day

One of the most challenging tasks for an executor of a will is often reconstructing a record of gifts given by the deceased person, generally by poring over bank statements. People frequently fail to keep records of their gifts, which can lead to a lot of administration and detective work for their executors. Simply noting down your gifts – who you gave them to, how much, and when – can save a great deal of time. In some cases good record keeping could also ensure that all available exemptions can be properly and efficiently claimed, thus saving time, money and tax.

4. You should not give too much away if you might need care in the future

If there is a risk you might need significant care in the future, be careful not to give too many of your assets away. Your local authority will likely be asked to contribute to the cost of your care if you do not have enough money to pay for it yourself. If they believe that you have intentionally given away assets to avoid care fees – known as ‘deliberate deprivation of assets’ – they will assess you for care fees as if you still had those assets, thus putting the burden on those who received the gifts or your heirs.

5. They should be very careful about giving gifts for someone else if they are acting under a power of attorney

If you are acting under a power of attorney for an elderly relative, your ability to give gifts on their behalf is extremely limited. Beyond that, you must get permission from the Court of Protection if you wish to make further gifts. If you do not, you risk the Court making you take the gift back or your power of attorney being revoked. The gifts may also be viewed by HMRC as invalid and therefore, even if the 7-year survivorship period has passed, HMRC may treat them as chargeable to IHT.

Duncan Mitchell-Innes, Partner in the Private Client team at TWM Solicitors, says: “Many people are rushing to make gifts right at the moment as they believe that doing so may save tax. However, there are things that can go wrong if giving is done too hastily.”

“Taking professional advice when considering gifting can yield significant benefits, particularly where larger sums are involved.”