With the current slew of changes impacting the way in which Inheritance Tax (IHT) is determined, it may seem odd that there is one area that has been untouched for 40 years.
The rules around gifting as a means to reduce IHT have been largely unchanged since their introduction in the 1980s, but this does not mean that they are well understood.
Nuance in the rules results in some fearing that they may fall foul of regulations and end up paying more in tax bills.
We are going to break down the rules around gifting and determine whether you can lower your IHT bill.
What are the Inheritance Tax gifting rules?
Individuals can gift up to £3,000 a year tax-free (and can carry forward any unused £3,000 allowance from the prior tax year).
This is the figure that was established with the introduction of the current gifting rules in the 1980s.
While this was a generous allowance back then, the impact this has had on estate management has decreased over time.
The threshold has not risen in line with inflation, or at all, and so it now seems like a token means of offsetting a fraction of wealth.
It is worth noting that this exemption is only relevant when considering gifts given within the seven years prior to a person’s death.
Any gifts that fall outside of the seven years are not under consideration for IHT at all.
Within the seven years, there is a staggered rate of tax application.
The tax rates are:
This means that gifting remains a viable process even as your death approaches.
However, this will not be relevant where the combined value of the estate of the deceased and the gifts they made in the 7 years before death are within their available Nil Rate Bands (excluding Residential Nil Rate Band, this is at least £325,000 per person).
Additional gifting allowances of between are available for wedding gifts (£5,000 for parents, £2,500 for grandparents, and £1,000 for others).
Gifts of up to £250 per year can also be made to an unlimited number of people.
Charity gifts can also reduce the value of your estate and reduce your overall IHT burden. A sufficient level of gifts to charity in your estate may unlock a discounted IHT rate.
The gifts themselves do not incur IHT as it is the charity that benefits rather than a descendant.
There is a lesser-known element to consider, and that is gifting out of income.
Individuals can make regular gifts from surplus income without those gifts being a part of IHT calculations.
This is subject to strict rules as the gifts must be part of a regular pattern and cannot affect the donor’s standard of living.
To make use of this exemption, it is imperative that you maintain effective records, as HM Revenue and Customs may wish to scrutinise these claims.
Can gifting reduce Inheritance Tax?
As noted, gifts given outside of the seven-year threshold are entirely exempt from IHT.
If you have descendants who are set to inherit parts of your estate and can be trusted to do so early, then it may be worth gifting them these assets ahead of time.
As more of your assets and wealth become considered for the purposes of IHT, it is time to effectively plan for your future.
Overseas property and investment are no longer exempt from IHT calculations, and as of 2027, unspent pensions will be considered a part of your estate.
High-value assets and appreciating should be the priority when assigning gifts, as these will be the key determinants in the amount of IHT paid.
Of course, these assets are likely the ones that you would least like to part with, so streamlining your estate in other ways may be necessary.
Gift giving between spouses is not considered a part of IHT, as it is assumed that assets are largely shared anyway (there are restrictions on this for gifts from UK residents to non-long term UK tax resident spouses).
This may act as a temporary salve for reducing your estate, but it will add to the size of your spouse’s estate, and this could lead to it being subject to IHT later down the line.
In short, the most effective way to circumvent IHT would be to know exactly when you will die and gift all your high-value assets more than seven years before then.
Obviously, that is not possible, so regular lifetime gifting may just have to do instead.
Seeking professional advice is the best way to understand your potential IHT bill and plan for ways to reduce it when possible.
If you are thinking of using gifting as a means to reduce your Inheritance Tax bill, speak to our team for expert advice.
