How to avoid inheritance tax by giving your money away

Ruth Jackson Kirby explains how to avoid inheritance tax by passing money on to your family while you are still here.

Many of us worry about inheritance tax and how we can minimise how much of our estate goes to the taxman. One way to reduce his take and significantly improve the finances of the younger generation is to give away your money while you are still alive.

Nearly £1trn will be inherited over the next decade. However, says Steve Webb in The Times, “there is a problem: the average age of inheritance is rising and for many people these windfalls... come too late in life.” 

Research by the Institute for Fiscal Studies has found that the average person born in the 1960s will be 58 when their last surviving parent dies. For those born in the 1980s the figure rises to 64.

“The wealth of the retired population could do much more good if it were received by sons and daughters in their 40s or even grandchildren in their 20s,” says Webb. With interest rates pitifully low the benefit of giving away some money while you are still alive grows. You can get far more joy from watching a gift help a loved one get on the property ladder or start a family than watching it stagnate in a cash Isa.

So, if you want to start passing on inheritance money while you are still alive what’s the best way to do it? Before you start doling out the cash think about how much you will need. Only give away what you can afford to lose; don’t risk your retirement or money to cover future care costs. Anything you give away will not count towards a future inheritance-tax bill, provided you live for seven years after the gift. Everyone can give away up to £3,000 a year and it is immediately excluded from your estate for inheritance tax purposes. You can carry over the previous year’s allowance if you didn’t use it.

“An often-overlooked inheritance-tax exemption can allow grandparents to chip in towards their grandchild’s education costs without risking a tax liability,” says Rachel Rickard Straus in The Mail on Sunday. “Gifts of any amount are free from inheritance tax if made regularly and out of income rather than savings.” Not sure where to put your gift? Children can have a Junior Isa where up to £9,000 can be deposited each year and grow tax-free. If you have a relative looking to buy a house you could contribute towards a Lifetime Isa to help them with a deposit. “A well-timed gift could fund the deposit for a first home, the cost of a wedding, or [make]... further study an option,” says Webb.

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