How does leaving my assets to my grandchildren affect my estate’s IHT tax position?

Many people are confused by the Inheritance Tax rules which can be hard to navigate and have tripped up many unsuspecting families.

Inheritance Tax (also known as IHT or the “death tax”) is charged at 40 per cent on the value of your estate that exceeds the Inheritance Tax threshold – currently £325,000, or £650,000 when combined with a spouse or civil partner.

If you are passing down property, you may also benefit from the main residence nil-rate band. This increases your tax-free threshold by £175,000, but only if you leave your home to children (including adopted, foster or stepchildren) or grandchildren and your estate is worth less than £2 million.

So, when passing down your estate to grandchildren, it is only the part of the estate that exceeds the Inheritance Tax threshold – and main residence nil rate band if passing down your home –  that is charged.

But what if you want to pass down property and assets to grandchildren while you’re still alive?

This is known as gifting, and if used correctly, can help you pass down more of your hard-earned estate.

Under the “annual exemption” rule, you can give away up to £3,000 worth of gifts each tax year (spanning 06 April to 05 April) without them being added to the total value of your estate. Any unused annual exemption can be carried forward, but for one year only.

You can also gift a wedding present of up to £1,000 per person (£2,500 for a grandchild or great-grandchild or £5,000 for a child) without attracting tax.

But gifts that do not qualify for relief, exceed your personal threshold, and are made within seven years of your death may attract Inheritance Tax on a sliding scale, known as the “seven-year rule”.

After this the gift will not be counted towards the value of your estate.

Consideration must also be given of any potential Capital Gains Tax implications on any lifetime gifts to grandchildren which may bring about an immediate CGT liability.

At Moore Thompson we are able to explain, in no-nonsense terms, how tax issues might impact on your estate and help you sort out your financial affairs.

We will work on your behalf to ensure that your tax liability is minimised so that more of your hard-earned money stays with you, your business and, eventually, your loved ones and because we stay ahead of the curve, we will make sure that any changes to the tax regime are reflected in our advice to you. To find out more, please contact us.