How to Gift Tax-free Cash

If a gift is to be effective in reducing your inheritance tax liability, you cannot continue to have any access to the assets you give away or continue to use them in any way

Tilney 8 December, 2014 | 10:41AM
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As part of our Morningstar’s Guide to Financial Planning, head of estate planning for financial firm Towry Ian Dyall takes a look at gifting cash to the family.

Christmas is not typically a time when people think about tax and financial planning, it is a time when people think about family. It is also a time they think about helping others, with many people gifting to charity around Christmas. It is therefore a very useful time to consider what is the best way of helping your family and other people by making gifts, particularly if you have an inheritance tax liability, as making regular gifts can have a significant impact on reducing any liability that you may have.

If a gift is to be effective in reducing your inheritance tax liability, you cannot continue to have any access to the assets you give away or continue to use them in any way. Gifts that are covered by the inheritance tax exemptions will immediately reduce your tax liability.

Which Gifts are Immediately Exempt?

You can make as many “small gifts” of £250 each tax year as you like and as long as they are to different recipients they will be immediately exempt from inheritance tax. This can be useful if you have a number of grandchildren that you’d like to help, particularly as the amount is not excessive so the risk of giving them this money is low.

If you wish to gift more than this you can make gifts up to a total of £3,000 per tax year and this will also be immediately exempt. For example, if you have two children you could give them each £1,500 per tax year. The small gifts mentioned above can be made in addition to this but the recipients of the £3,000 cannot also receive £250.

If you have more income than you require, then it is possible to give this away. As long as the gift of income is regular and does not affect your standard of living then it should be immediately exempt from inheritance tax. For some people this may be a significant amount of money and many people are wary of giving excessive sums to an individual, particularly if they are very young. If this is the case, you may consider gifting this money to a trust which you can control, rather than outright to an individual.

Gifts made within the three exemptions mentioned above will be immediately effective in reducing your inheritance tax liability. You can make gifts in excess of these exemptions, but generally you would need to live for seven years before they reduce your liability.

Deciding how much of your money you may need yourselves, particularly if you need long term care in the future, can be difficult.  Cashflow forecasting can be used to define how much you can afford to spare and give you the confidence to enjoy gifting, or spending the money they have.

Developing a strategy for regular gifting as opposed to making ad hoc gifts ensures that the money you give away provides the greatest benefit for the recipients and can have a significant impact on reducing your tax bill.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Tilney  provides personal financial advice and investment management services to private individuals, families and trustees