Inheritance tax (IHT) liabilities could be reduced by giving gifts during a lifetime, but failing to keep the right paper work could leave loved ones facing a hefty tax bill.
The standard rate of IHT is 40 percent, applied on parts of an estate above the standard £325,000 threshold, but this can be reduced through certain methods of tax relief such as giving gifts.
Britons can give gifts out of their regular income as well as out of annual gifts allowances, but an expert has urged people to watch out for a potential pitfall of gifting parts of their income.
Carolyn Matravers, a chartered financial planner and director at Bluebell Financial Management, has urged those hoping to take advantage of this inheritance tax relief to keep accurate records.
Britons are looking for ways to reduce their inheritance tac liability
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She explained: “Gifting money not only helps mitigate any potential tax liability, but it also means you can pass on wealth to loved ones now, when they may need it more and you can see them benefit.
“But again, make sure you keep back enough to maintain your own lifestyle.
“That is where cash flow planning comes in – a hugely important part of IHT planning, it helps to realistically calculate household income and expenses which then enables any gifting opportunities to be identified, whether that is regular gifts out of income, larger lump sum gifts or both.
“If you don’t spend all of your income each year you can gift any excess away and this will be immediately outside of your estate for IHT purposes.
“However you must beware - the rules on this can be quite complex and you will need to keep accurate records.”
Accessing a loved one’s bank statements online will often not be easy after they pass away, the tax expert pointed out.
Ms Matravers said: “Getting into good habits and keeping proper records makes such a difference and saves costs ultimately for the estate.
“People forget that when someone passes away the only real access to historical bank statements are the printed versions which are not so freely available.
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Households are looking to save money on IHT
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“If there are no paper bank statements to validate income and expenditure, then it will involve a painstaking task of recreating income and expenditure to demonstrate any regular gifts out of income which have taken place.
“This requirement can come as a huge surprise to Executors and can be costly, time-consuming and in some cases, impossible to do.
“Therefore, if you don’t join the dots, you may run into problems.”
