Gifting and Inheritance

‘Tis the season, and to get in the holiday gifting spirit of things, I thought it would be a good idea to take a look at gifting and inheritance planning for before the tax year ends. Focusing on Inheritance Tax (IHT) threshold changes and the rules around annual gift allowances.

I’m Lucy Miles, the Director of Private Client for CTT. With 15 years of experience in the Tax and Trust space, I know a thing or two about IHT and gift allowances; I also love Christmas and organise the CTT Christmas party every year!

Around this time of year, people are far more likely to give to charitable causes, and in this spirit we’re going to delve into the advantages of gifting as well as efficiency around tax planning for this time of year, preparing for the next tax year.

How to maximise tax efficiency for the tax year

As a higher rate taxpayer, you pay 40% tax on anything earned over £50, 271. High net worth individuals will pay even more if they earn over £125,140.

Falling into either of these brackets means that having a forward-thinking tax planning strategy is going to be advantageous. Identifying the areas where you could be paying less tax allows you to save more and prepare for any unforeseen circumstances with ease.

There are many ways to help you mitigate a large tax burdens, such as maximising pension contributions or investing in an ISA. In this article we are going to explore gifting as a way to increase tax efficiency.

This is only one strategy out of many strategies you can take to help alleviate a tax burden. At CTT Private Client we specialise at helping high net worth individuals plan for inheritance tax and business succession to name a few and are experts at advising you on the best ways to manage your money, not just for now, but for the generations to come.

And what better way to ensure your wealth for the future than by giving a gift!

Gifting and inheritance in a nutshell

Lifetime Giving Strategies –

Passing down wealth to close friends and family upon death is a great way to protect your money by making sure it ends up in the hands of those you trust, but that money will likely be hit with a hefty IHT bill.

Giving away wealth during your lifetime is actually a very tax efficient way of reducing IHT on your entire estate. IHT currently sits at a 40% tax above the threshold of £325,000, with lifetime giving you can impact this significantly.

Essentially by gifting your estate while you are still alive you can bring down its value below this threshold, avoiding the higher rate in IHT altogether. This guarantees that more of your wealth gets passed down to your beneficiaries rather than being eaten up by IHT.

Some useful giving strategies include:

• Regular gifts – if you have a high income and want to help support your children and grandchildren or even your favourite charity, then making regular gifts out of your income exemption and non-exceptional spending will be a great way to reduce your estate without affecting your regular lifestyle.
• Trusts – to retain control over how your assets are used, consider setting up a trust. Trusts are ideal for providing for those that are unable to deal with large sums of money or make complex financial decisions for themselves, such as the young or vulnerable. Using a trust gives you tools to structure your gifting strategy to better suit your financial circumstances.
• Gifting assets – rather than gifting money, you can gift other types of valuable assets. Property, valuable possessions, even shares; you can gift any of these and it will still apply with the seven-year IHT rule, whereby anything gifted seven years before you pass is exempt from IHT, these are known as Potentially Exempt Transfers (PETs).

Annual Exemptions –

Annual exemptions have been recently changed, as of 2024 the annual exemption is just £3,000. This money can be given as a tax-free gift yearly and includes money or assets up to the £3,000 value.

As we have discussed, getting your estate under the IHT tax thresholds will lead to more of your money going to whomever you wish, using your maximum annual allowance is a good way to decrease the value of your estate on a regular basis.

Charitable Donations –

Giving to charity has several benefits over and above the obvious. Yes, you are helping others but because of various tax relief schemes for charitable donations, the benefits extend to you as well as those you give to. Donations you make to charities or to community amateur sports clubs (CASCs) are completely tax free.

Donating through Gift Aid allows the charities you donate to, to claim back 25p of every £1 you give. It doesn’t cost you anything extra and can increase your donation substantially, depending on how much you give.

In order to qualify, you need to ensure you don’t pay more than 4 times what you paid in tax for the tax year. For higher-rate taxpayers you can claim back the difference between the tax you paid on the donation and what the charity was able to claim back through Gift Aid; you will need to do this through self-assessment tax return.

If you decide to donate land, or property, you don’t pay tax on it. It’s important to keep records of these types of donations to show that the gift or sale has been accepted by the charity.

All of this can help to reduce your tax bill at the end of the year, and you give to some worthy causes!

Trust and Estate Planning –

Preserving your assets through a trust is one of the most efficient and effective ways to protect your wealth.

Trusts are used to manage assets, money, investments, and land, and are an exceptionally useful means to gift your assets in life as well as after death. Trusts provide amazing control and flexibility, allowing you to secure assets for beneficiaries but still retain control through changing circumstances.

There are many different types of trust you can take advantage of such as a bare trust; usually used for minors, these allow you to leave assets and if you survive seven years after the trust has been set up, the amount will be free from IHT.

To learn about this type of trust, or for more information on gifting your wealth in strategic ways, get in contact with us here at CTT Private Client, we’ll be happy to help and are always on hand for a chat about the best ways to protect your wealth for the future.