Dealing with Inheritance Tax (IHT) is a challenge many beneficiaries will have to tackle. Even more so over the past few years, as an increasing number of British households have been caught in its net.
FTAdviser reports that, as of 2023, 1 in 25 estates have found themselves liable for IHT, as a growing number of British families are affected.
Another report by FTAdviser found that IHT receipts were up by almost £1 billion year-on-year for the 2022/23 tax year compared to 2021/22 figures. Over the same period, total IHT receipts amounted to £7.1 billion — a record-breaking intake for HMRC.
The problem has arisen partly as a result of the frozen IHT nil-rate band, which has remained at £325,000 since 2009. Meanwhile, the average salary in the UK has continued to rise and house prices have soared in the years since.
If you’re concerned about IHT and are interested in lowering your liability, read on to find out how gifting while you’re alive might be a potential solution.
Gifting allows you to pass on your wealth and assets to your loved ones while you’re still alive
HMRC allows you to gift some of your money each year without paying tax. Gifting can be used to pass on your wealth and assets to loved ones while you’re still alive and potentially avoid a hefty IHT bill.
Gifts can be made to:
- Spouses or civil partners
- Friends or family
- Organisations, such as charities.
You could gift any amount tax-free as long as it abides by the “7-year rule”
The “seven-year rule” typically allows you to make tax-free cash or asset gifts provided you live for at least seven years after the date the gift was made. This is known as a “potentially exempt transfer” (PET).
However, if you die before seven years have elapsed, the gift you made may become liable for IHT.
In the first three years after you’ve made the gift, IHT is taxed at the standard 40% rate if you die. After three years, the rate of IHT tapers on a sliding scale year-on-year until seven years have passed and the gift usually becomes completely tax-free, as shown by the table below:
This is known as “taper relief”. It only applies to your estate if the total value of the gifts made in the seven years before you die surpass the £325,000 nil-rate band threshold.
Gifting using your annual exemption
Each tax year you are entitled to make £3,000 worth of gifts as part of your annual exemption. These can be made without them being added to the value of your estate for IHT purposes.
You could opt to gift the entire amount to one person or split it between multiple individuals. You can also carry over any unused amount from your annual exemption to the subsequent tax year.
Gifting to your spouse or civil partner is typically tax-free
There are several useful IHT benefits that come as a result of being married or in a civil partnership.
Transfers between married couples and civil partners are typically not subject to IHT.
You can gift as much as you like during your lifetime to your spouse or civil partner, as long as they:
- Live in the UK permanently
- Are legally married or in a civil partnership with you.
Partners can also pass on any unused nil-rate allocation to their surviving spouse, boosting the amount they’ll be able to leave behind IHT-free.
You could make tax-free gifts as part of a wedding celebration
Each tax year, you are entitled to make tax-free gifts to individuals getting married or starting a civil partnership. These include:
- £5,000 to your children
- £2,500 to your grandchildren or great-grandchildren
- £1,000 to any other person.
If you have multiple children, grandchildren, or great-grandchildren, all getting married this year, you can gift to each of them up to the above limits.
Wedding gifts do not count against your annual exemption. So, for example, you could opt to make a gift of £8,000 to your child at their wedding – combining the wedding gift allowance and your £3,000 annual exemption amount (as long as you had made no other gifts using your annual exemption in that tax year).
Note: you can’t combine the wedding gift allowance with the small gifts allowance.
You can gift by making regular payments out of your income
Another useful way to gift is to make regular payments to another person from your income. However, there are a few rules you will need to follow to avoid becoming liable for IHT.
There are no limits on the amounts you can give away tax-free, if:
- You can make the payments without affecting your usual living conditions and costs
- You pay out of your regular monthly income.
You may need to prove the above to HMRC so good record-keeping is key.
You could use these payments to help:
- Your children pay their rent, especially if they’re studying at university or undertaking an internship
- Save into your child’s bank account provided they’re under 18
- Provide financial support to an elderly relative or a loved one that needs care.
You can make as many small gifts of £250 as you want each year
You are entitled to make small gifts each year of up to £250 to each person provided you haven’t used another allowance on a gift to the same individual.
These can be very useful for gifting to larger families, or friends and colleagues, without utilising your larger exemptions.
These can include gifts for:
- Birthdays
- Christmas
- Graduations
- Anniversaries
- Office celebrations.
Read more: 3 unmissable reasons why “now” is better than “later” when it comes to gifting an inheritance
Get in touch
If you’re worried that your estate might become liable for IHT and leave your loved ones with a substantial bill once you’re gone, it might be worth considering gifting your wealth while you’re still alive.
If you’re interested in learning more about how it works and other ways to account for IHT in your estate plans, you should reach out to us by email at info@lloydosullivan.co.uk or by calling 020 8941 9779.
Please note:
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
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.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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