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It’s only free if you claim it!

Have you ever bought a service such as broadband where the provider offers a free gift card for signing up? There’s often a catch that you’ve got to visit a web page within a certain period to get it. I’d love to see some data around how many people forget and miss out on the incentive.

In a similar vein there are a number of ‘freebies’ (exemptions) which can help reduce the amount of Inheritance Tax [1] (IHT) your family might have to pay when you die. Gifts made during the last seven years of your life (occasionally 14 years – it’s complicated), other than to your UK domiciled spouse, are generally added back into your estate to work out your IHT bill. Gifts covered by these freebies are not subject to this and could save your family up to 40% tax.

However, just like the gift card example they have to be claimed – they aren’t automatic. Here’s the basics of how these work.

1) Annual freebies

There are two of these. The main one is the £3,000 Annual Exemption. You can give this amount away or use it against a bigger gift. The part of the gift covered by the exemption is IHT free. So, you can potentially save up to £1,200 of IHT (at 40%) each year. If you don’t use it you can carry it over to the next tax year, but after that it’s lost.

There is a smaller exemption too. The Small Gifts Exemption lets you make individual gifts of up to £250 to as many people as you want each tax year. The only snag is that you cannot have used any of the other exemptions on the same person. Other than that, there is no limit.

2) Wedding bells

For those who choose to marry or become civil partners the cost of the celebration is only limited by your imagination. Whether it’s affection, tradition, or purely tax planning, it’s not uncommon to help the happy couple pay for the event. Anyone can gift up to £1,000 without it being at risk of IHT further down the line, this amount increases to £2,500 for grandparents and £5,000 for parents.

3) Living costs

This is about supporting dependents such as unmarried partners, children, or elderly relatives. You might be contributing to the care costs of a parent, or helping a child cover their rent at university. A large gift – such as a house to live in – is unlikely to be successfully covered by this.

4) Normal expenditure out of regular income

This is almost exactly what it says on the tin. These gifts must be from income (not capital) and cannot impact your lifestyle – you can’t use your income for gifts and then draw on assets to fund life! These gifts need to be habitual which normally means they happen periodically. This does not always have to mean every month, or year on the same date, or indeed the same amount every time – but often it does.

Making sure the freebies get claimed

The problem is that in order to claim these freebies, the executors of your Will need to know which ones you are eligible for. If they don’t know, or can’t demonstrate it to HMRC, it could cost thousands of pounds of unnecessary tax.

For the first three they need to be able to identify the gift, recipient and exemption. In fact, for all gifts they should be able to identify the recipient as in some cases they may have tax to pay.

Claiming the normal expenditure out of income freebie is quite a bit harder. For each of the years in which a gift is made under this exemption your executors will need to give details of your income and expenditure. They will be asked to provide a breakdown with the following categories given as an example on this form [2].

Income Expenditure
Salary Mortgages
Pensions Insurance
Interest (including ISAs) Household bills
Investments Council Tax
Rents Travelling costs
Annuities Entertainment
Other Nursing Home fees
Take off Income Tax paid Other

The best way you can help your executors claim these potentially valuable freebies is (assuming you use them) keeping clear records. You might not want them to know the full details during your lifetime but having this information in an accessible place can save money at a very stressful time. Some people like to keep information about their accounts there too along with their Will.

Planning ahead

In the past nine years the amount HM Revenue and Customs has raised through Inheritance Tax (IHT) has more than doubled, to £5.2bn [3]. Mainly as a result of the government freezing the £325,000 threshold, known as the nil-rate band, above which the 40 per cent tax is charged on estates.

Effective financial planning [4] can in most cases reduce the amount of inheritance tax that is ultimately due on your estate. EQ’s financial planners use cashflow modelling to forecast your future income and look at any potential IHT issues.

Contact us

Please feel free to give us a call on 020 7488 7171 or email us at enquiries@eqinvestors.co.uk [5], alternatively, you can book an appointment here [6].