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Gifting: how to minimise inheritance tax

11 March 2024

How can you minimise the amount of inheritance tax when you’re looking to pass things on to other people? Our wills, trusts & probate experts look into how gifting can be of significant use to you and your beneficiaries.

Between 2022 and 2023, over £7bn in inheritance tax (IHT) was paid. Payments of IHT continue to rise, partly due to the main tax-free allowances having been frozen since 2021 – namely the nil-rate band (NRB) and the residence nil-rate band (RNRB) – all while house prices increase in value. As a result, we are seeing more people reviewing their estates and looking into whether they can minimise IHT by gifting in their lifetimes.

A lifetime gift of an asset or money to an individual is treated for IHT purposes as a potentially exempt transfer (PET). At the time, this means that no tax arises on the gift. The donor’s NRB, however, is reduced by the value of the gift and, if they die within seven years, it reduces the NRB tax free allowance available to their estate.

If the person survives this seven-year period from the date of the gift, the NRB is restored to its value before the asset or money was gifted, meaning it has no impact on the IHT position of the estate.

Such gifting and survival can be an effective tool to help minimise inheritance tax, though it relies on the uncertainty of living for at least seven more years.

Other reliefs that don’t require survival of seven years are available. One of those is a person’s annual exemption (currently £3,000 a year) which can be gifted without affecting someone’s estate. The annual exemption can be used in one gift or a total combined value of multiple gifts.

IHT exemptions apply to gifts made between spouses or to a charity. Any such gifts made during a person’s lifetime are completely exempt from inheritance tax. Despite this, please note that the rules are different where a spouse’s domicile status is different from each other.

Further allowances and exemptions are available to a person who makes small gifts, or gifts that are made in consideration of a marriage or civil partnership. A person can make as many gifts of up to £250 per tax year per individual without it influencing the IHT on their estate. Furthermore, larger gifts without impacting a person’s estate can be made in anticipation of marriage or civil partnership.

Where a person receives income that is more than their expenditure, they can gift away funds from the surplus amount, with such gifts then exempt from IHT.

If one of the above exemptions or reliefs is not applied to a lifetime gift, the person doesn’t survive seven years or the gifts made in the person’s lifetime exceed the NRB available, then the recipient is liable to pay the IHT due.

Unsurprisingly, this can cause quite a shock and a number of issues. A form of relief can be available to that beneficiary, however, which can reduce the rate of IHT paid, although this is dependent on how long ago the gift was made.

Lifetime gifting can be an efficient way of minimising a potential IHT bill, but it is a very technical area of estate planning that requires a bespoke approach. Our highly rated wills, trusts & probate team would be happy to discuss with you whatever questions or queries you may have.

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Our Legal 500-rated wills, trusts & probate team has the expertise to help you plan for the future and guide you through any difficult challenges that may arise, including those relating to inheritance tax.

Disclaimer: All legal information is correct at the time of publication but please be aware that laws may change over time. This article contains general legal information but should not be relied upon as legal advice. Please seek professional legal advice about your specific situation - contact us; we’d be delighted to help.
Ashley Wood LLB (Hons), LLM
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