Inheritance tax: Financial advisor provides advice
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The complexity of the British Inheritance Tax system means it’s very easy to make mistakes when it comes to gifting. Statistics show that £50billion is given away to HM Revenue and Customs (HMRC) every year in payments that could be avoided.
Hundreds of taxpayers are caught out every year when it comes to paying Inheritance Tax (IHT) with figures showing that the average person loses £250,000 each by paying ‘unnecessary’ tax on gifts.
Admittedly, a lot of this is when people gift property but they are also being caught out when it comes to gifting smaller amounts of money.
With Christmas just around the corner, there is no better time to brush up on the rules.
The annual exemption rule allows an individual to ‘gift’ up to a total of £3,000 each tax year without paying any tax but there are ways people can give more and avoid a bill from HMRC.
Before giving cash this Christmas, people should check whether they could carry a previous tax allowance over.
If Britons don’t use their allowance in one twelve month period they can carry it forward one tax year so this could potentially increase their allowance to £6,000 or even £12,000 for a couple.
Although exemptions can increase people’s tax free allowance, they must remember that they can only use an exemption once.
To make matters more complicated, British taxpayers can give £250 under the small gift exemption rule as well.
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However, they could also give more if their loved ones have wedding plans for the year ahead.
Emi Page, Associate at law firm Winckworth Sherwood, explained how people can make the most of these tax breaks.
She said: “A parent could gift their child up to £8,000 – a £5,000 gift made in consideration of marriage plus using their £3,000 annual exemption.
“Or possibly up to £11,000 if they can carry forward a full unused annual exemption from the previous tax year.”
Ms Page added: “It is therefore important to be mindful of the tax implications if you are planning on making a large gift to someone who is getting married or entering a civil partnership.
“Review the exemptions and their limits carefully so your gift can be made as tax efficiently as possible.”
Meanwhile, when it comes to passing on assets, Britons are losing even more money in tax that could be avoided.
Geoffrey Todd, Partner at Boodle Hatfield said hundreds of people are being caught out each year when passing assets along to the next generation.
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Mr Todd said: “On average, they are throwing away more than a quarter of a million pounds each by falling into an avoidable trap,” he said.
“Unfortunately, this can lead to beneficiaries facing hefty bills, so it’s crucial to seek professional advice before including the family home in one’s estate planning.”
People should also remember to take the seven year rule into consideration.
Assets may be gifted without incurring IHT provided the donor survives for at least seven years after making the gift.
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