Case of the month August 26

How much is too much???

Issue

Mrs A approached ETC Tax to review her Inheritance Tax position. Her estate was valued at approximately £1.5 million, including her home, savings and investments.

She wanted to provide financial support to her children and grandchildren during her lifetime but was concerned about giving away too much, the potential Inheritance Tax consequences and whether she would have sufficient funds for her own future needs.

With Inheritance Tax potentially charged at 40% on the taxable value of an estate above the available allowances, Mrs A wanted to understand whether gifting some of her wealth now could form part of a more tax-efficient estate plan.

How We Helped

We reviewed Mrs A’s estate, income and existing estate-planning arrangements to identify opportunities to make gifts in a structured and tax-efficient way.

Our advice considered:

• Making a £300,000 lifetime cash gift to her children.
• How the seven-year rule would apply to the gift.
• Making use of the £3,000 annual gifting exemption.
• Whether unused annual exemption from the previous tax year could be carried forward.
• Establishing a programme of regular gifts from surplus income, where the relevant conditions were satisfied.
• Ensuring Mrs A retained sufficient assets and income to support her own lifestyle and future needs.
• Keeping appropriate records of gifts to make the eventual administration of her estate easier.

We also recommended that her wider estate plan and will were reviewed alongside the gifting strategy.

Outcome

Mrs A was able to make a significant gift to her children during her lifetime while retaining sufficient funds for her own financial security.

It was confirmed that Mrs A had both the current year and previous year annual exemptions available as she has not made any previous gifts in these two years.  This totalled £6,000, and these are applied first to the gift.

After taking into account the above available exemptions, the remaining £294,000 gift was treated as a Potentially Exempt Transfer (PET). Provided Mrs A survives for seven years following the gift, the £294,000 would become an exempt transfer after seven years and not be subject to Inheritance Tax on death.

For illustration only, if the full £300,000 would otherwise have been subject to Inheritance Tax at 40%, a £300,000 reduction in the taxable estate would equate to £120,000 of tax. The actual Inheritance Tax position would depend on the circumstances at the time of death, including the available thresholds, exemptions and reliefs.

The regular gifting strategy also provided an opportunity to gradually reduce the value of her estate further, where gifts qualified for the relevant exemptions.

Benefit to the Client

Mrs A gained a clear, structured plan for passing wealth to the next generation rather than simply waiting for assets to pass under her will.

Most importantly, she was able to see her family benefit from her wealth during her lifetime, while potentially reducing the future Inheritance Tax exposure on her estate.

The advice also gave her confidence that the gifts formed part of a wider estate plan that balanced tax efficiency, family objectives and her own long-term financial security.

Next Steps

If this is a situation you are in or you have any queries do not hesitate to contact us enquiries@etctax.co.uk