When planning for the future, and specifically for your beneficiaries when you die, any potential Inheritance Tax (IHT) you may pay on your estate is an important consideration.
The amount of money being paid in IHT is higher than it’s ever been. According to the Office for Budget Responsibility’s economic and fiscal outlook, over the coming five years, families could pay £37 billion in IHT – up 36% on the sum paid between 2017 and 2021.
The key reason for this increase is that, while inflation has risen and so estates are often worth more than they were, the threshold for paying IHT has remained the same.
Usually, your estate will pay 40% tax on any wealth above the nil-rate band of £325,000. There is also a residence nil-rate band of £175,000 that applies if you decide to leave your home to your children or grandchildren. So, you could leave up to £500,000 to your loved ones before IHT is due.
When planning for your death, gifting can be a great way to reduce the amount of IHT that will be due on your estate.
If you’d like to maximise your beneficiaries’ inheritance, read on for useful IHT gifts you can make use of to potentially reduce your tax bill.
1. Annual gifting exemption of £3,000
Each year, you have a gifting exemption of £3,000. This means you can give away this much during the tax year and it will immediately fall outside your estate for IHT purposes.
The exemption can also be rolled over to the following year. So, if you didn’t use it in the 2021/2022 tax year, you can gift £6,000 this year.
It’s also worth remembering that £3,000 is the individual exemption. So, if you’re part of a couple, you can gift £6,000 a year between you.
2. The “seven-year” rule
In theory, you can gift as much money or other items of your estate as you like to anyone. Providing you live for seven years from the date of the gift, it typically won’t be subject to IHT. This is because the gift becomes a “potentially exempt transfer” (PET).
If you die within seven years of the date of the gift, it may become a “chargeable transfer” and your estate may have to pay some IHT.
The amount of IHT payable reduces between years three and seven, so the longer you live following the gift, the less tax they could have to pay. This reduction over time is known as “taper relief”.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
With this in mind, it’s a good idea to keep a record of any gifts you make as, during probate, your executor will need to calculate the amount of IHT payable. In each case, make a note of:
- The date of the gift
- The beneficiary
- The amount that you gifted.
3. Small gifts of £250 or under
Gifts up to and including £250, to anyone, are not subject to IHT. Additionally, they do not form part of your £3,000 yearly exemption.
This means that any Christmas or birthday presents for your children or grandchildren are not counted as part of your estate, providing they do not exceed £250 per gift, on each occasion.
4. Gifts from your income
IHT rules feature an exemption for “normal expenditure out of income”. This means that regular gifts from your income, such as savings for children or grandchildren, or meeting the care costs of a relative, may be free from IHT.
To qualify for this exemption, you must meet the following:
- The gift must come from your income, “taking one year with another”
- The gift must be part of your normal outgoings – in other words, the gift should be of a regular amount and take place at regular times
- The gifting should allow you to maintain your standard of living.
As it can be difficult to claim this IHT exemption, keeping a record of the gifts is vital. Ensuring that your intention to make the regular gift is in writing should make it easier for your executor to calculate.
5. Wedding or civil partnership gifts
A gift to a couple for their wedding or civil partnership will fall outside your estate for IHT. To be excluded from your estate, you must make the gift before the wedding and the ceremony must take place. The amounts you can gift up to are as follows:
- Up to £5,000 to a child
- Up to £2,500 to a grandchild or great-grandchild
- Up to £1,000 to another family member or friend.
Get in touch
If you’d like advice on making gifts and reducing your potential Inheritance Tax liability, please get in touch. Email [email protected] or call us on 0345 505 3500.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.