Yahoo Finance The crucial tax allowance that has been stuck at the same level since 1981
There has been a lot of focus recently on inheritance tax following the introduction of new rules that will ultimately allow a couple to pass on a £1m home tax-free.
The new residence nil rate band, which is being phased in from this year, will by 2020 give each individual an additional £175,000 inheritance-tax-free allowance on top of their existing £325,000 exemption.
This will apply when someone is leaving their main residence to a “direct descendant” – which with a few exceptions means a child or grandchild.
While this new rule has its complications – and arguably should be offered as a straightforward £500,000 allowance for all – the additional limit is better than nothing.
This is particularly the case when Government figures show that IHT receipts reached their highest ever rate last month – of £483m for March.
But the Government has overlooked a much simpler option that would boost the passing of wealth between generations.
The annual gifting allowance – which is the amount that an individual can hand to another person each year, tax free – still sits at a measly £3,000. This rate has not changed since 1981 and has certainly not kept pace with rising prices.
If it had increased in line with inflation it would now be worth £10,000 – or more specifically £10,522.88.
Inheritance tax | How does it work?
As Rachael Griffin, of Old Mutual Wealth, puts it: “As positive as the new residence nil rate band is, many people would like to help their families while they are still alive.”
Of course individuals can gift more than £3,000 a year but for it to be entirely inheritance tax-free they must survive for seven years after the gift. If they die within that period a certain amount of tax is due, if their estate is over the nil rate band for inheritance tax.
For example, someone who gifted £10,000 (assuming they had already gifted £3,000 that year) but died three years later would see a 40pc tax bill applied to the gift. If they died five years after making the gift this falls to 16pc.
There are special circumstances where more than £3,000 can be gifted, IHT-free. For example, someone can give a child £5,000 when they get married or have a civil ceremony, or a grandchild or great-grandchild £2,500.
Many, but clearly not all, families are in a situation where they have significant wealth they want to pass on.
Increasing longevity means that men aged 65 will live to 87 and women until 89. This means that if they wait to pass on their wealth until they die, their children will be in their 50s and 60s before they receive the money.
By this time most own property and have gone through the most expensive part of their lives – having typically had children and risen up the pay ladder.
This has led to more wealth skipping generations, going directly to grandchildren.
However, if the gifting allowance was raised, those able to pass on wealth through their life would be more free to do so – and people could help their families when they most need it.
laura.suter@telegraph.co.uk
