LOGGING INHERITANCE TAX GIFTS

One of the best ways to reduce your inheritance tax liability is to make gifts during your lifetime. This article explores how to document these transactions by logging inheritance tax gifts as you go. Ultimately, this will save a lot of hassle for your family after your death.

Key points:

  • About inheritance tax gifts
  • Logging inheritance tax gifts
  • Lump sum inheritance tax gifts
  • Inheritance tax gifts out of income
  • Planning your inheritance

About inheritance tax gifts

Inheritance tax is usually paid on the value of your assets when you die. Inheritance tax is calculated by totalling your assets, and taking away liabilities. What is left can be reduced by various tax-free allowances, and exemptions.

One simple way to avoid inheritance tax is to make lifetime gifts to your family, or others. 

Broadly, lifetime gifts fall into 3 categories:

  • Exempt transfers
    These gifts should be free of inheritance tax, such as:
    • Gifts to charities
    • Gifts to your spouse or civil partner
    • Gifts to political parties
    • Gifts within the annual exemption (£3,000)
      You can double this exemption if you had not made a gift in the previous tax year.
    • Small gifts under £250
      You can give up to this amount for as many people as you want.
    • Gifts out of income
      You can give away surplus income on which you have paid tax, provided that you do not need to use capital withdrawals instead of the gifted income to pay for lifestyle costs.
    • Marriage gifts to certain family members
      The limits change depending on who you make the gifts to.
  • Chargeable lifetime transfers
    These are gifts that attract some inheritance tax at the point when the gift is made, even if the person is still alive at the time. Typically, these are gifts to certain trusts, like discretionary trusts.
  • Potentially exempt transfers
    These gifts are typically lump sums that do not fall into the other categories, for example a £50,000 gift to each of your children while you are still alive, perhaps to help them to buy their first home. Potentially exempt transfers do not attract tax immediately, and should avoid inheritance tax after 7 years.

Logging inheritance tax gifts

If your gifts are aimed at avoiding inheritance tax, it makes sense to document these gifts. The alternative is that your family is likely to have to sort through your documents after your death to prove how much was given away, and that no tax is due on those gifts. This can be an onerous task, especially if there are many gifts, and they started years before your death.

Logging inheritance tax gifts – an easy method

When logging inheritance tax gifts, it makes sense to look at the information that your personal representatives will be expected to provide in order to obtain probate (control over the assets after your death). This is declared on an official form called the IHT 403.

This inheritance tax form is helpful while you are making the gifts, as it shows you the data that HMRC will need. A straightforward solution is to keep a copy of this form with your important  papers, and log the gifts as you make them, along with evidence such as bank statements. If your personal representatives can easily complete this form, the calculation for inheritance tax should be relatively easy (and your estate is less likely to be investigated).

Lump sum inheritance tax gifts

If you have made inheritance tax gifts that could be chargeable if you die within 7 years, log these on page 3 of the IHT 403 form.

Logging inheritance tax gifts lump sums

This asks for the following information:

  • Date of the gift
  • Name and relationship of the individual/charity/organisation who received the gift
  • Description of the assets given away
  • Value on the date of the gift
  • Any inheritance tax exemptions applied (such as the annual exemption of £3,000)
  • Net value of the gift after exemptions or reliefs

Keeping associated records would be sensible, such as valuations, statements etc.

Gifts out of income

If you have made inheritance tax gifts out of income, these should be exempt from inheritance tax, since you have already paid income tax on this money. However, be careful not to give away money from income if you then need to dip into capital to fund your lifestyle. HMRC would deem that these gifts are instead gifts from capital, and could be liable to inheritance tax as set out in the previous section. Log these on page 8 of the IHT 403 form.

Logging inheritance tax gifts out of income

This asks for the following information, split as totals for each tax year:

  • Tax year when gifts were made
  • Breakdown of your income for that tax year
  • Breakdown of your expenditure for that tax year
  • Surplus income left over for that tax year – this is what can be given away
  • Gifts made in the tax year

 

Again, we recommend that you retain records for this information, although this is unlikely to be checked. This might include tax returns, bank statements, budgets etc. You should also write a simple letter to whoever receives the gift to declare your intentions.

Planning your inheritance?

Your assets are worth a considerable amount and you want to maximise this potential in order to secure a lasting legacy for your family’s future. Alternatively, you may want to pass your money on to another person, or charity.

You want your hard-earned money to provide the biggest benefit for your family, and so you want to do what you can to avoid inheritance tax. Overall, you want to control how your money is passed on, so you can be sure you always have enough for your own needs.

Our Prosper service is designed to help people like you to:

  • Control your future
  • Save inheritance tax
  • See the benefits of your money
  • Be sure you never run out of money

Contact us to discuss your situation in confidence with an experienced, professional financial planner.

Click here to download our free mini guide on Planning Your Inheritance.

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Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.

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