Gifting to save inheritance tax – level up your plans

Gifting your money throughout your lifetime can be a good way of reducing your beneficiaries’ inheritance tax (IHT) bill. But it’s often overlooked or left too late. So, whether it’s something you’re looking at for the first time or just as a refresher, here are some of the fundamentals.

This article isn’t personal advice. Inheritance tax can be complicated, if you’re at all unsure of a course of action then you should ask for financial advice. Tax rules can change and any benefits will depend on personal circumstances.

Getting the basics in place

Before we even get into gifting, get the foundations in place by asking yourself:

If you haven’t given any of these questions any thought yet, then it could be a good idea to think about addressing them first.

Gifting allowances

Here are a number of gifts you can consider making which are immediately exempt from IHT.

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

This example shows that planning well in advance could have a significant impact. But if it’s left to the last minute (or not done at all) it won’t have as much of an impact.

Remember, if anyone you want to gift to is under 18 (e.g. younger grandchildren), you could gift into a Junior ISA or Junior SIPP where it can be invested for their future. Once in a pension these gifts can only be accessed from age 55 (from 57 in 2028 and could change again in the future).

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 exceed an allowance, 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. But how much tax is paid will depend on when you pass away during that 7-year period.

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 transfer and passing, the greater the taper relief and therefore the lower the tax bill.

Trusts and other tools to think about

Making outright gifts often means giving up access and control of the money gifted. There might be circumstances where you want to have more control. Gifting money into a trust can provide you with a degree of control over who can receive the money, when and for what purpose.

Using trusts can come with extra complexity. But used 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 taxed at a lower lifetime rate of 20%. Although, if you die within 7 years of the gift being made, further IHT of up to 20% may be payable.

As with lots of financial planning tasks, the most difficult bit is applying them to your specific circumstances. Here are some other tools and scenarios to think about.

Life assurance policies – depending on your situation, a life assurance policy could be a good option. Typically the policy would be held in trust. This means if you pass away the policy will pay out immediately, and could be distributed to your beneficiaries without forming part of your estate. Premiums would need to be kept up for the policy to pay out and could be quite high depending on your age and health.

Consider the order in which gifts are made – it’s important you plan when and how you gift for your particular situation. If you’re mixing the way you gift, timing is everything and it’s important that clear records are kept of any gifts and thought is given to how they might interact with each other.

Gift with reservation rules – these rules prevent people making gifts while still retaining the benefit of the asset they ‘transferred’. A common example is where someone gifts their home to a beneficiary but still lives there without paying fair value for its use (known as a market rent).

Gifting assets – when gifting any assets you have to be mindful of the potential tax implications like capital gains tax, and how assets held within a trust would be taxed.

Gifting to charity – leaving some of your money to charity can also help reduce any IHT bill, as well as being able to help a cause you care about. This is called leaving a ‘charitable legacy’. If you leave at least 10% of your net estate to charity in your Will, it would cut the IHT rate applied to the remainder from 40% to 36%.

Effort vs reward of gifting

Managing how we might financially help our children, grandchildren, charities and chosen beneficiaries can be a thought-provoking exercise. There’s a lot you can do to make sure those who you want to benefit end up with more, while working within HMRC’s rules. Whether that’s helping a child or grandchild get onto the property ladder or help with student debt, or being as philanthropic as you can to the causes close to your heart.

Gifting can play a large or small part of your overall IHT planning. If you think you need help in this area, our advisers can explore a range of ways to help you pass on wealth while trying to limit the impact of tax. Of course it will depend on your situation and you might also want to involve your solicitor and tax adviser.

Could our advisers help you with IHT planning?

A call with our advisory helpdesk is the first and most important step towards getting IHT advice. It will help you:

You won't get personal advice on the call and there’s no pressure to take advice. Only if it’s right for you, will we book your free initial consultation with one of our specialist Financial Advisers.