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December 14th 2023

How to use gifting to reduce your Inheritance Tax

In my experience, clients are often worried about Inheritance Tax but are unsure where to go to reduce their liabilities.

It’s a confusing subject but many don’t realise that there are perfectly legitimate and legal avenues to reducing your Inheritance Tax that could significantly benefit your loved ones in the long run.

What is Inheritance Tax?

In its simplest form, Inheritance Tax (sometimes written as IHT) is a tax levied on your estate (at 40 per cent) when you die.

You may have heard it called “the death tax” and there has been a strong push back on its existence in the UK from both politicians and the public since its introduction in 1986.

There are complex rules that delineate who pays it, including a threshold of £325,000. (If your estate is valued below this then you won’t have to worry about Inheritance Tax).

The £325,000 threshold is transferable from one spouse to another, increasing the overall tax-free amount to £650,000 for married couples.

In addition, the Residence Nil-Rate Band allows for £175,000 of the house in which you live to be tax-exempt. This is transferable between spouses also – giving you a possible £1 million in tax-free estate to pass down to your loved ones.

As you can see, it’s a complicated calculation to work out someone’s Inheritance Tax liabilities and is something many of our clients leave to us.

Where do gifts come into this?

Understanding the role of gifting within the context of Inheritance Tax is the first step to reducing the amount of tax your estate could be subject to when you die.

Gifting remains a legitimate method and is commonly used among higher-wealth individuals to protect their estates.

Gifting potentially allows individuals to pass on assets to their loved ones tax-free, provided certain conditions are met.

Every tax year, individuals have an annual gifting allowance of £3,000, which is exempt from IHT, and this can be carried forward for one year if it's not fully used.

Additionally, small gifts of up to £250 per person per year are exempt, provided the recipient hasn’t benefited from other exemptions.

In addition, wedding gifts, which enjoy exemption within certain limits, and regular gifts made from income, are not included in IHT calculations.

Gifts that don't fall under these exemptions are classified as 'Potentially Exempt Transfers' (PETs).

The seven-year rule

A gift is only exempt from Inheritance Tax if the giver survives for seven years post-gift.

This rule was introduced to prevent sudden death bed gifting as a means of avoiding Inheritance Tax.

If the donor survives for seven years after making the gift, it becomes exempt from IHT, so it pays to give gifts to your family sooner rather than later.

If the donor passes away within these seven years, the gift may be subject to IHT on a sliding scale known as 'taper relief'.

We can help you give the gift of no Inheritance Tax bill to your family

Maintaining detailed records of gifts is crucial, as HM Revenue & Customs (HMRC) may require this information during Inheritance Tax assessments.

This includes details such as the date, value, recipient, and relationship to the donor for each gift.

The legal framework surrounding gifting and IHT is intricate and subject to change so staying abreast of the latest legal developments and seeking timely advice from your accountant is advisable to ensure compliance and optimise tax efficiency.

Accountants play a vital role in guiding clients through the complexities of IHT and gifting.

We can offer tailored advice on effective estate planning, ensuring you make informed decisions that align with your financial goals and familial obligations.

For personalised advice and support on IHT and gifting strategies, reach out to one of the Scholes CA team.

Email: enquiries@scholesca.co.uk


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