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Scratching your head for gift ideas this festive season?
Giving shares, investments and cash might be just the right gifts to spoil your loved ones with this Christmas and to ensure the security of your estate. However, without sufficient prior knowledge or having a plan in place, you may accidently incur capital gains tax charges and other expenses.
“If you want ensure that your family has financial support for their future, it’s crucial to have open and honest conversations about your financial plans,” explains Barry Griffin, a senior lawyer in the Wills, trusts and probate team at Debenhams Ottaway, based in St Albans.
Barry talks us through the different types of gifts you can give your loved ones, how to mitigate inheritance tax and gain a deeper understanding of your estate.
Q: Why is communication so vital for the security of your estate?
A: Speaking openly about your estate and your wishes is the essential first step in creating an effective inheritance plan. Having a long term plan in place and taking the right advice from professionals puts your estate in a very strong position.
A recent study found that two thirds of the population intend to pass on wealth, but only 17 per cent have an actual plan on how to achieve that (source: Progeny/YouGov). When asked to name the key barriers, 18 per cent said their own lack of knowledge around inheritance planning was a major obstacle.
Discussions with loved ones about financial matters can be difficult, and sometimes it's tough to know where to start. As our thoughts turn to the Christmas period and the importance of family, putting thought into action by passing on your shares, investments and other assets may demonstrate just how much you care.
Q: How do gifts protect the long term stability of your estate?
A: If you’re searching for ways to soften the blow from capital gains tax or inheritance tax during the division of your estate, gift giving often tops the list. You can make gifts of up to £3,000 each tax year without any inheritance tax impact. If you can afford to give more you can, and provided you live for more than 7 years, you will have reduced your estate and the eventual inheritance tax liability.
It's important to understand what exactly constitutes a gift, to ensure you do not accidently cross the annual allowance. Gifts can be anything of value which have been transferred from one person to another. Cash is the obvious example, but property, investments and heirlooms all fall under the same umbrella.
This is particularly crucial as people often creep towards the £3000 mark without realising it – for example, giving your child a car for Christmas, will contribute to your annual allowance in the same way as gifting shares or a lump sum of money.
Q: What are the exemptions and expenses that apply to gifts?
A: For stocks and shares, one of the expenses to be aware of is capital gains tax. If you’re gifting shares, or selling them to make a cash gift, capital gains tax may be chargeable on the gains on those shares (since you bought them), if they exceed your annual allowance of £12,300. It's also worth noting that the annual capital gains tax allowance will fall to £6,000 from April 6 2023, so all the more reason to gift those shares this year.
However, if the shares have decreased in value then you will not need to pay capital gains tax when you transfer them. In these uncertain economic times, it may be wise to make a gift of any shares that have fallen in the short term, as they may increase in value over time.
Giving to charity is particularly important, as we think of those less fortunate during the festive season and in the wake of the cost of living crisis. Gifts made to charities are completely exempt from inheritance tax, so there are no adverse effects to giving generously.
Q: Are there other ways to mitigate the impact of inheritance tax?
A: For those looking to preserve their wealth for future generations, and still exercise a level of control over their finances, trusts are an effective method. Putting assets into trust for children or grandchildren, whilst remaining a trustee, ensures you have some influence on how much is received and when. Trusts allow you to start your gifting journey sooner and that all important 7 year clock. The growth on certain types of trusts may also not be included in the value of your estate for inheritance tax. This gives you the opportunity to build up a separate fund for your family’s future.
Q: How can Debenhams Ottaway help you properly manage your estate?
A: We are here to provide clients with professional expertise and ensure that their inheritance plan works for them. Aside from giving you a greater understanding of the tax implications, we can also work closely with your accountant and financial advisor on estate planning.
By working out the size of your estate, what you can afford to give away and the recipients, we can help you to financially support your loved ones or charitable causes close to your heart.
For advice on all aspects of Wills, probate, tax planning and estate administration as well as gifting, please contact Barry Griffin at bg@debenhamsottaway.co.uk or 01727 738249.
