Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Q. I have two ISAS totalling £40,000. My savings are £40,000 over £325,000 so how can I give away money to avoid inheritance tax?
Individuals can usually pass on £325,000 to beneficiaries without inheritance tax (IHT) applying when they die, hence the significance of your total savings being £40,000 over that threshold.
Your question of how to give some of these savings or investments away to avoid IHT depends on who you intend to give the money to. I’m also assuming here that we’re talking specifically about savings and/or investments and not property, such as your home.
Money held in ISAs does not enjoy any special exemption from IHT. However, anything you pass on to a spouse does pass to them IHT free. With an ISA your spouse can even maintain the money in the ISAs they inherit from you and keep on enjoying tax-free growth and income for themselves as long as the money is held within an ISA. They can even do this without impacting their own annual ISA allowance.
For anyone other than a spouse the rules vary. First of all, it’s important to note that the only way to gift the money in an ISA to anyone in your lifetime would require you to withdraw the money from the ISA first. That money would immediately lose its tax-free ISA status. The recipient could of course potentially put any money you gift them into their own ISA, depending on their own eligibility.
Whether you can gift them that money IHT-free though, depends on the amount you give and whether you survive more than seven years after giving them the money.
Under the seven-year rule, you can gift any amount IHT-free as long as you live for at least seven years after giving the financial gift. If you die at any time within the seven years, a reduced rate of IHT applies to any amount above your nil-rate band (currently 40% within three years, 32% after three years, 25% after four years, 16% after five years and 8% after six years).
There are other ways around it though if you gift smaller sums. For instance, you can give away £3,000 per year (in assets or cash), divided between one or more people, without IHT applying at all. You can also carry forward one preceding year of annual exemption to gift £6,000 in one year.
You're allowed to give £250 per person per year to as many people as you like without IHT applying (as long as they haven't benefitted from your annual exemption).
You can contribute to someone's wedding, as long as you gift this amount before the wedding day and it actually takes place. You can give £1,000 to anyone you know, £2,500 to a grandchild and £5,000 to a child.
You can pay for the living costs of your own child under age 18, or in full time education. This includes university, but you may need to show that financial support is not excessive and only covers living costs and tuition fees.
You can also give regular amounts away that you don't need from your income, without IHT applying. You may have to show that this money was not needed to maintain your standard of living.
If you want to pass on larger sums and have it happen after your death, then you could speak to an adviser about possibly placing the money into a trust.
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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