If you’re looking to gift money or property to your family, it’s vitally important that you consider the impact of inheritance tax and capital gains tax on these gifts.
The tax implications can be complex, but with the right advice and the right inheritance planning, it’s possible to save up to 40% of your inheritance tax costs using the currently available reliefs and exemptions.
Inheritance tax and the available reliefs
Inheritance tax is paid on the value of your net assets at the date of your death. You don’t pay any tax on the first £325,000 in your estate – that’s tax-free. Anything above that £325k allowance will be taxed at a rate 40%.
At present, the UK tax code includes the following inheritance tax reliefs that, in certain circumstances, allow you to drastically reduce your tax liability:
- £3,000 annual exemption. When you gift an asset worth over £3k, and subsequently die within seven years, there will be tax to pay on this gift. But if the gift is £3k or under, it’s exempt and there’s no tax to pay.
- £250 in small gifts can be given.
- Wedding gifts are exempt.
- Gifts to charities are also exempt.
- Gifts made more than seven years before you die are exempt. If you gift something and survive for seven or more years after the gift is given, there will be no tax to pay on this amount.
You can also make use of business property relief (at 100%) and agricultural relief (at 50%) to cut down on those tax costs. Both reliefs tie back to your capital gains allowance, so it’s important to talk to a tax specialist who can help you get the maximum possible saving while meeting the strict conditions for the relief.
If you’re a sole trader with a balance sheet of £250k or less, and have been trading for 20 years or more, any gifted items, land or property would be included in your estate – with the outcome that the business value wouldn’t then be taxed.
It’s also worth noting that lettings businesses are classed as property investments and wouldn’t be eligible for business property relief or agricultural relief.
The impact of capital gains tax
You pay capital gains tax (CGT) on the value of an asset (in excess of its base cost) when that asset is sold or gifted.
If you’ve deferred any gains, these will become chargeable to capital gains tax (CGT) when you crystallize them. So it’s important to manage these gains effectively, avoid crystallizing them where possible and do your utmost to limit your exposure to capital gains tax.
The best way to do this is to plan ahead and work with an adviser who can help you to minimise these liabilities. When you make a gift it’s regarded as a disposal – so you have to value the asset and any value in excess of the cost could be liable for CGT. This can get complicated, and talking to a tax specialist is definitely advised if you want to get the most efficient outcome
Our Tax team are experienced in capital gains tax planning and can potentially reduce your liabilities by claiming holdover relief and by gifting between spouses – you can also plan to utilise any available capital losses and offset them against the CGT.
The exact details of your tax planning will be different for each individual and each business, so it’s important to sit down with one of our tax advisers so we can understand your situation, your financial goals and the best way we can help you to complete your tax planning effectively.
The importance of making a will
One element of inheritance planning that is often overlooked is the importance of making a will.
More than 60% of the UK population don’t have a will, and this can cause all manner of problems when you pass away and don’t have your estate or financial affairs in order.
- If you don’t have a will, it can cause delays in distributing your estate to your beneficiaries.
- If you die intestate (without a will), the UK intestacy laws may not pass your assets to the people, family and organisations you’d have wanted to benefit.
- Your business assets may lose value if you can’t continue to trade or someone (your successor) can’t trade on your behalf.
- If you leave more than a certain amount to charity, you pay a lower inheritance tax rate of 36% – but with no will in place you won’t be entitled to this lower threshold.
Let us help you secure your estate’s future
As with most things in the financial world, the key to a good inheritance strategy is great planning and a forward-looking focus on your wealth and good management of your will and estate.
At Saint & Co, we’ve been specialising in tax advice and planning for over a century. Our experienced team of tax specialists will work with you to create a tax-planning strategy that delivers the best possible outcome for you, your beneficiaries and your business.
Contact your local Saint & Co office to arrange a session with one of tax specialists – and start planning for the future.