For every £100k you give away now you’ll save £40k in tax later

9 March 2021

By Alan Masson, Head of Tax, SBP Accountants and Tax Advisors

Life is precious and the past 12 months have certainly placed a glaring spotlight on the issues of both life and death. 

With the UK surpassing the shocking 100,000 milestone for Covid deaths recently, it has made people of all ages realise that the future is not guaranteed and the events of the past year has equally encouraged many to get a grip on their finances.

However, one of the most difficult conversations is always around death and many simply prefer to avoid the situation rather than make decisions which could benefit their estate when they pass away.

With the national debt growing as the pandemic rolls on, it seems inevitable that the chancellor will, at some point, be faced with making increases in tax and it seems likely that inheritance tax would be in the running as a target.

Now, this could mean changes to the thresholds for nil rate, or it could mean changes to what you can give away as lifetime gifting.  These are just possibilities for now and it’s unlikely that any announcements will be outlined at the upcoming budget on 3 March, so for those who haven’t considered death and taxes now is the time to start.

The biggest misconception is that beneficiaries are charged tax on inheritance, however the charge is actually on the estate of the person who dies and any value over £325,000 is taxed at 40%.  Of course, this ultimately reduces the amount that beneficiaries receive and, in this day and age, £325,000 is not a lot when you consider the value of property, so most estates would likely hit that threshold.

So, what can you do now to start reducing the tax liability?

Firstly, tax planning is essential as you can agree to give away assets with a view to reducing the value of your estate as anything gifted seven years prior to death wouldn’t be eligible to tax.  However, there is a pitfall.  If the gift is made within a three-year period, the full value will be considered as part of the estate, and anything between three and six years will be eligible for a proportion of tax liability.

Secondly, you can give away £3,000 tax free to any one person per year and if you don’t use this annual exemption it can be carried forward to the next year for a maximum of one year.  There is also the option to give £250 a number of additional people annually.

These are the two key areas that people should consider at the very least when tax planning regards inheritance tax.  Some assets, such as business assets, insurance policies written into trusts, and ISAs are tax exempt, so these are also worth considering.

There is no inheritance tax between married couples, which has created interesting circumstances, such as recently when a straight man in Ireland married his gay best friend to avoid paying €50,000 tax on the house he wanted to leave him.  However, if you have no-one to leave it to, my best advice would be to spend it and enjoy it yourself!

Wherever you are with tax planning, you really have to start with a will, but death is notoriously a difficult conversation for everyone and in my years of experience, there are two extremes, the tax planners and the non-tax planners, and nothing really in between.

Most people leave it too late and if you are 50+ or approaching retirement it is something that you really need to address sooner rather than later.

If you’re still not convinced that it is worth thinking ahead, here are some figures to ponder over - for every £100,000 you give away before you die, you’ll save £40,000 in tax later!