Generational Planning: Generosity Pays | AAG Wealth Management

Generational Planning: Generosity Pays

Posted: February 9, 2016

Making the most of lifetime gifting opportunities can ease an Inheritance Tax burden and help intergenerational planning needs.

As the end of the tax year approaches, now is the perfect time to use reliefs and exemptions that otherwise would be forever lost. An important one, sometimes overlooked, is the gifting of assets, which can add up to significant savings in Inheritance Tax (IHT) over the years.  We explore ways in which gifting exemptions can help alleviate the impact of IHT on your estate and also make a real contribution towards the financial needs of other family members.

More and more people are becoming liable to IHT, so anything you can do to lessen the burden on your heirs should be welcome. According to figures from the Office for Budget Responsibility (OBR), a higher number of families are paying IHT than at any time in the last 35 years, and they will continue to increase in the tax year which starts on 6 April¹.

One simple and, indeed, rewarding way to reduce a future IHT liability is to give away some of your wealth during your lifetime. By moving it out of your estate while you are alive, you are reducing the total on which IHT will eventually be calculated. And ‘exempt gifts’, as they are called, are outside of your estate from the moment you give them – you don’t have to survive for another seven years, as is usually the case with other larger gifts.

Annual opportunity

With the end of the tax year in sight, perhaps the most important planning opportunity is the £3,000 annual gifting exemption. In any one tax year, an individual can make exempt gifts worth up to £3,000. This can be given to one person or broken up into any number of smaller gifts.

If you don’t use one year’s exemption, it can be carried forward into the next tax year – but only the next year. After that, it lapses. In terms of order, the current year’s exemption must be used first. Say, for argument’s sake, that you gift nothing in year one. Then, in year two, you give away £5,000. That is made up of £3,000 from the (current) year two allowance and carries forward £2,000 from year one. The unused £1,000 cannot be carried forward to year three.

“Husband and wife can each make annual gifts of £3,000,” points out Tony Müdd, divisional director, tax and technical support at St. James’s Place. “So by using the carry forward provisions, a couple could potentially remove £12,000 from their joint estate immediately. If used systematically over successive years, significant sums can be saved.”

Such amounts could go a long way towards helping younger family members face up to the financial challenges of further education, first home deposits and so on, by making use of investment wrappers such as Junior ISAs, regular savings plans or even children’s pensions.

Small steps

A separate small gifts exemption allows you to give up to £250 to as many people as you like. This can be used for birthday presents, Christmas gifts and the like. The sum of £250 is the maximum per person and, if it is exceeded, the entire relief is lost. A gift of £260 does not qualify, and the relief would not apply to the first £250. The same person cannot receive a ‘small gift’ of this kind as well as part of your annual gifting allowance.

One imperative with any gifting arrangement is the need to keep a record of what gifts were made to who and when, as this will make things much easier for your executors when the time comes.

These ‘lifetime exemptions’ may seem modest, but used consistently and cumulatively they can generate considerable savings. And they become all the more important in the light of a frozen nil rate band. From the early 1980s onwards, the nil rate band, above which IHT is payable, used to be increased every year regardless of which government was in power. Since 2009, however, it has remained unchanged at £325,000, so it is even more important to use to the full whatever reliefs are still available during your lifetime.


¹ Office for Budget Responsibility, January 2016
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances. The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of AAG.

Alexander Associates Group (AAG) is a holistic Wealth Management group and provider of a wide range of complementary services. The wealth management advice, for both individuals and corporates, is provided by AAG Wealth Management, a Principal Partner Practice of St.  James’s Place Wealth Management. Other services offered by AAG fall outside of wealth management advice and are separate and distinct to the services offered by St. James’s  Place. They are not covered by the St. James’s Place guarantee*, which is solely reserved  for wealth management advice provided by representatives of AAG Wealth Management.

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