The Office for National Statistics (ONS) inheritance tax data shows estates liable for inheritance tax in the UK face an average bill of nearly £175,000 each.
There are many ways to help manage Inheritance tax so that you can pass on as much of your hard- earned wealth to your loved ones and other beneficiaries, rather than to the taxman. One way is to gift your money during your lifetime.
A Potentially Exempt Transfer (PET) is the term for gifting away money during our lifetime. This is only potentially exempt, as the individual gifting their cash or assets must live at least another seven years or they will still remain liable to Inheritance Tax.
This seems simple but there are several issues that can arise where a PET is used, including:
- The seven-year time frame
- As a gift it cannot and must not be returned
- Once given away the beneficiary can do what they like with the money
- Gifting money early may advantage one family member over another
- People are often wary that hard earned family money may be lost through divorce settlements.
- The benefactor may need the money themselves later in life.
Gifting money needs to be considered carefully and there is a balance to be struck between giving away wealth during our lifetime to reduce the size of our estate and maintaining some control over who can access it and when. Having the right advice before taking any action is imperative.
Parents who choose to gift part of their wealth to their children are often keen to keep control over how the money is spent.
A recent survey conducted by Prudential, revealed that while participants plan to pass on significant assets to their heirs, three-quarters of those surveyed wanted to have some control of how their legacy is spent.
Key concerns when passing on their wealth include potential situations where inheritance could end up being given to their children’s spouses in the event of a divorce, or wanting to ensure that their grandchildren also benefited from having the inheritance passed down to them.
One in 10 wanted to stipulate that their children must receive professional financial advice on receiving their inheritance.
Alarmingly, despite more than a third of over-55s are concerned about paying inheritance tax on their estate, less than a fifth have actually taken action to reduce their potential tax bill.
Aside from giving money to family and friends, many people wish to leave a legacy to a charity. Such gifts do not get charged to inheritance tax, regardless of when they are made but with the right advice, both the charity and the family can achieve much greater benefit from such a gesture.
Take someone with a liquid estate of £500,000 who wants to bequeath 3% (£15,000) to their chosen charities. With the right advice, a simple change to the will, even post death, could see the charities gain a further £2,500 and the family a further £4,800 simply by taking advantage of generous tax breaks.