Reducing Inheritance Tax by Giving Away Your Estate Before You Pass Away

With the inheritance tax-free allowance frozen at £325,000 for the next four years, many more families are gifting their loved ones a 'pre-inheritance' before they die. 

According to the latest research, the number of people who are given a 'pre-inheritance' gift now outstrips the number that receive money through the more traditional form of a will. Some 46% of British adults have received a 'pre-inheritance', where the benefactor passes on some of their estate to beneficiaries while still alive. Meanwhile, just 37% of adults have received money through the more traditional inheritance route of a will, according to research by Aviva.

Clive Bolton, a director at Aviva says: 'We are seeing a number of shifts in how people use their money in retirement. The pre-inheritance is a fairly new initiative. Alongside the obvious benefits of cutting the amount of money liable for inheritance tax, it also seems many benefactors like to see their money being enjoyed whilst they are still alive. In addition, it also allows benefactors, if they wish to have some input into how the money is spent. For example, some people are choosing to help grandchildren by paying off student debts or providing a deposit for a first home.'
In many cases, this support is proving essential for the younger generation. The biggest example is buying a home. With lenders tightening their borrowing criteria in the downturn, fewer and fewer young people have been able to afford to step on to the property ladder without substantial help. But there are pitfalls to gifting away wealth before death, and careful long-term financial planning is absolutely essential. Many over 55s may want to assist their loved ones financially, but would not be best advised to leave a pre-inheritance, as they may need to access all their wealth to support their retirement.
Any amount of money given away outright to an individual is not counted for tax purposes if the person making the gift survives for seven years. These gifts are called 'potentially exempt transfers'. You can give as much as you like away and it will escape IHT but you must not retain any interest in the gift. If you die between three and seven years of making the gift, then if tax is due, the amount paid is reduced. This is on a tapering scale, so if you die six years after making it, the beneficiaries pay a fifth.

Some cash gifts are exempt from tax regardless of the seven-year rule.

They include:

• Wedding gifts of up to £5,000 to each of your children; wedding gifts of £2,500 to each grandchild, and wedding gifts of £1,000 to anyone else;
• Additionally, you can give away up to £3,000 a year (plus any unused balance of £3,000 from the previous tax year) or make gifts of up to £250 each to any number of people each year regardless of the seven-year rule.
• Gifts to charities, the National Trust, national museums, the main political parties and most registered housing associations also qualify for full tax relief. 
• Any gifts made from 'income' rather than 'capital' do not incur IHT payments. This means that if you draw income from the interest on an investment and gift it to a relative, you effectively escape the tax provided that you do not need the income yourself.

Extracted from thisismoney.co.uk