With Easter only a hop away now (excuse the pun) that means only one thing… Tax Year End is also fast approaching.
When it comes to the end of the tax year, there are certain allowances that most people are aware of but there are some that go under the radar. It is worth noting that the usual allowances such as maximising ISA & Pension allowances should not be ignored. With the introduction of flexible ISAs several years ago, it is also worth noting that if you have drawn money from a flexible ISA in this tax year, you can contribute this amount back into your ISA, on top of the usual limit of £20,000, before the end of the tax year.
In addition to these considerations, we thought it might be beneficial to raise some of the less common allowances that people could be thinking about at this time of year.
Currently in the UK, one of the highest rates of tax, outside of Income Tax, is Inheritance Tax. Currently charged at 40% for assets over an individual’s Nil Rate Band(s), Inheritance Tax planning can be one of the most valuable elements we discuss with clients.
Numerous planning elements can be considered here and a variety of different investment and tax structures can help reduce the final tax bill on an estate. We are not going to delve into these structures in any great detail but we are more than happy to pick up this discussion separately. What is important to note is that whilst a solution may be to gift money to future generations before you pass away, typically, these gifts would remain within your estate for seven years. Depending on the size of the gift, there is a chance that the rate of tax payable may reduce over time but it is worth bearing in mind that a gift could become chargeable on the estate if the donor was to pass away within seven years.
In addition, a gift can be classed as a ‘gift with reservation’ if you continue to benefit from the asset. For example, gifting your house but continuing to live in it or gifting a holiday home to your children but still using it for holidays for free. If a gift is classed as a gift with reservation then this continues to remain within your estate.
What is often overlooked is that there are annual exemptions when it comes to gifting and whilst these may appear small, they can quickly add up.
You can gift away a total of £3,000 worth of gifts each year without them being considered part of your estate. This £3,000 can be split across different beneficiaries and can also be carried forward for one tax year so if no gifts have been made since 6th April 2022, there is the potential to gift £6,000 before the end of the tax year.
In addition to this exemption, there is a small gift allowance of £250 per person. This means that you can gift up to £250 per person, per tax year, as many times as you wish, as long as you have not used another allowance on the same person.
Finally, when it comes to gifting, there are also exemptions for people getting married or starting a civil partnership. You can gift up to £5,000 for a child, £2,500 to a grandchild, or great-grandchild or £1,000 to any other person.
By utilising these allowances over time, this process of gifting could have a major impact on the overall Inheritance tax that becomes payable.
Beyond these allowances, a planning piece that is often overlooked is the ability to gift out of regular income. Where you can demonstrate that you are making regular gifts which is not drawing on personal capital, these do not count towards any allowances and they do not sit within your estate.
There are no set rules for establishing a pattern but making monthly payments towards university costs for example would likely fall under this category. This is where a detailed financial planning piece can be massively beneficial. Being able to establish what you fundamentally require to fulfil all of your own goals, may open the opportunity to start benefitting the next generations earlier than you potentially considered.
As we touched on at the start, numerous different products and tax structures can be utilised in this area and where there is any doubt about the ability to gift within the rules we have touched on, we would recommend speaking with a financial advisor or a lawyer.
Footnotes
The above article should not be treated as individual advice.
