A financial adviser’s guide on inheritance tax and gifting

Gifting your money throughout your lifetime can be the simplest and most effective way of reducing your beneficiaries’ inheritance tax (IHT) bill.

However, before we get into gifting, it’s worth starting with a quick refresher on the rules around IHT.

Tax rules can change, and any benefits depend on personal circumstances.

Who has to pay it?

IHT is usually paid at 40% on the value of your estate (your property, money and possessions) over the £325,000 allowance (the normal nil rate band). There’s also an additional allowance of up to £175,000 if you pass on your family home to children or grandchildren. And, for any joint assets, you only include the value of your share.

This article isn’t personal advice. Inheritance tax can be complicated, if you’re at all unsure of a course of action, ask for financial advice. We can advise you on how to make use of tax allowances. But if you need complex tax calculations, we recommend consulting an accountant or tax specialist.

Gifting allowances – what are your options?

There are a number of gifts you can make which are immediately exempt from IHT.

Every tax year you can gift up to £3,000 without it being counted as part of your estate. A couple could combine their exemptions.

Wedding or civil ceremony gifts are also exempt up to £1,000 per person, or up to £5,000 for a child and £2,500 for a grandchild or great-grandchild.

Gifts to charities (UK registered) and political parties are usually immediately exempt as well.

You can also give up to £250 per tax year to any number of people, provided they haven’t received a gift from you which uses another exemption.

Although these exempt amounts might seem relatively small, gifting in these ways over time can make a big difference.

Numbers in action

If you use your £3,000 per year gifting allowance for 10 years, assuming tax rules stay the same, that would be a total of £39,620*. If this amount formed part of your estate and was over the £325,000 threshold, you’d be taxed at 40% on your death. Your beneficiaries would only receive £23,772 (instead of the £30,000 you could’ve given them IHT-free).

This example shows that planning well in advance can have a significant impact. But if it’s left to the last minute (or not done at all) it could cost you and your loved ones.

*Assuming this money is invested and was able to achieve an annual rate of growth of 5% after charges. Don’t forget all investments can fall as well as rise in value, so you could get back less than you invest.

PETs and gifting from income

Often overlooked, gifting out of surplus income can also be immediately exempt. To qualify there are some criteria that need to be met. The gifts would need to form part of your normal expenditure, be made from income (not capital) and leave you enough to maintain your normal standard of living. The definition of ‘normal expenditure’ can be a sticking point, so it’s sensible to keep very clear records.

If any gifts you make to individuals don’t qualify for an exemption, they’re usually classified as Potentially Exempt Transfers or PETs for short.

There’s no limit to how much you can gift as a PET, however the value of the gift would only be exempt from IHT if you survive for seven years after it’s made.

If you pass away within this seven-year period, the gift becomes chargeable and would then increase the overall tax bill. Your executors can claim taper relief, which reduces the tax payable on the excess you’ve gifted over your available nil rate band. This relief is available between three and seven years after the gift is made. The longer the period between the transfer and your passing, the greater the taper relief and therefore the lower the tax.

Trusts

Using trusts can be complicated. But when you use them in the right way, they can help your loved ones keep hold of more of their inheritance.

Gifting money into most trusts is classified as a Chargeable Lifetime Transfer (or CLT, for short). This means any money gifted over the £325,000 IHT threshold will be immediately taxed at a lower lifetime rate of 20%.

Although, if you die within seven years of the gift being made, you’ll be taxed up to another 20% upon your death.

Will you pay IHT?

To see whether you could be impacted by inheritance tax, use our IHT calculator.

The essential guide to inheritance tax

What to do with an inheritance

You shouldn’t rely on an inheritance to achieve any of your financial goals. You never know when you might get it and you could get far less than you expect. But if you do receive an inheritance, you could put it to good use. You could think about adding it to your pension, investing it for yourself or for a loved one, or using it to become more financially resilient.

If you’re not sure what to do, a financial adviser can help you decide.

Need more help with IHT planning or receiving an inheritance?

If you’d like to pass your wealth on in a tax efficient way, our financial advisers can help you:

• Understand the complex tax rules
• Put together a gifting strategy
• Use trusts to pass on your wealth

If you’ve received an inheritance, they can help:

• Choose if and how to invest your money

• Understand the tax implications of what you do with your money
• Create a plan to use that money to meet your long-term financial goals 

Find out more about financial advice

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