There are other ways to give without having to think seven or more years ahead. An underused facility is 'gifts out of normal expenditure'. Help your client document how much of their annual income they spend year to year. They can give the surplus away without the Pet rules applying as long as they are able to maintain their usual standard of living. The key is accurately recording the information. Normal gifts such as Christmas and birthday presents are included within this allowance too.
In addition to gifts out of normal expenditure, each individual has an annual exemption of £3,000 (therefore £6,000 for a couple) worth of gifts they can make each tax year without these gifts being added to the value of an estate. This can be carried back one year if a client has not fully used the previous year’s exemption.
It is also possible to give wedding presents of up to £1,000 per person (£2,500 for a grandchild or great-grandchild and £5,000 for a child).
Also exempt are payments to help with another person’s living costs, such as an elderly relative or a child under 18.
Finally, it is possible to give any number of gifts of up to £250 per person during a tax year as long as another exemption has not already been used on the recipient.
Gifts to charity
Another variant of the giving strategy is to gift money to charity, known as leaving a charitable legacy. Charitable donations do not count towards the total taxable value of a client’s estate. Giving away 10 per cent of their net estate reduces IHT tax to 36 per cent. 'Net estate' means the element of the estate eligible for IHT.
Those already planning to gift more than 4 per cent of their net estate to charity will actually leave their beneficiaries better off by lifting this to 10 per cent. Others who were not planning charitable donations might find the numbers encouraging. Someone with a net estate of £250,000, leaving £25,000 to charity, reduces the impact on beneficiaries by just £6,000.
An alternative strategy, particularly useful in later-life tax planning, is investing in assets that qualify for business relief – business property relief, as it used to be known. The big advantage here is the speed at which the assets fall out of the estate – just two years – and the fact that the client retains access and control.
Investments eligible under this scheme include Seed Enterprise Investment Schemes (SEIS), Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCTs) and certain AIM shares or portfolios.