Asset values have plunged across the board over the past year, but there might be a silver lining. “Some inheritance tax specialists are suggesting that now could be the perfect time to gift your assets to loved ones, and minimise the amount you’re forced to leave to the state,” says Kate Hughes in The Independent.
Estates are currently subject to 40% inheritance tax (IHT) on assets worth more than £312,000, rising to £325,000 from 6 April this year and to £350,000 in 2010. But the value of gifts made during your lifetime isn’t measured when you die. “Although any gift you make will be counted towards your estate for seven years, the asset is measured at its value when you pass it on”, says Julie Hutchison at Standard Life. “It’s known as value freeze and works for property as well as investments”. You can’t just give your house away and keep living in it rent-free to avoid the value being added to your estate. But you can gift it, as long as you pay the new owners a ‘market’ rent, which could now also be lower than last year.
Remember, though, that while “overall assets have devalued by 20%-30%, you’re still giving away the same proportion of your estate”, warns Geoff Tresman at Punter Southall Financial Management. So, “if you’ve a lump sum you can genuinely do without, by all means gift it. But very few people can afford to gift anything simply to reduce their IHT liability. And once you’ve committed to it, there’s no way back”. On top of this, property prices look set to keep falling for some time. Crystallising your property’s value for IHT purposes might seem to make sense now compared to last year, but hang on for at least another year, and you may save even more.