Inheritance Tax (IHT) has become even more topical with changes afoot after the Autumn Budget. Coupled with the rise in property prices over the past few years, more estates have been captured in the Inheritance Tax (IHT) net and now with the inclusion of pensions potentially attracting IHT from 2027, the number of estates captured will surely rise even further.

There are some reliefs to make use of, so your full estate does not necessarily have Inheritance Tax charged on it when you pass away. Each of us benefit from a ’nil-rate band’ of £325,000, meaning you usually will not be liable for IHT if the value of your estate is valued below this amount.

You can benefit from a ’residence nil-rate band’ of up to £175,000 if you plan to leave your home to children or direct descendants and meet the requirements. Should you have any unused nil-rate band or residence nil rate band this can be transferred between spouses or civil partners meaning that you could be able to pass up to £1 million without any IHT being due.

For those who will have an exposure beyond their allowances, gifting can be one way to reduce your estate’s exposure, as well as being a rewarding way to share your wealth. Though it is important to consider the implications of gifting as the rules can be complex in the UK.

There are certain exemptions and allowances to be aware of…

Everyone has an annual gift allowance of £3,000, which can be given away tax-free each year, and if you have not used the previous year's allowance you can look back one year and gift £6,000. You can also give small gifts of up to £250 per person to as many people as you like each year, provided they have not received any part of your £3,000 allowance.

There are also exemptions for wedding or civil partnership gifts, and gifts to charities which are not subject to IHT.

Gifts from regular (or out of surplus) income also are allowable if you can afford them after meeting your own living costs and so long as your standard of living is not altered.

These gifts must be habitual or regular in nature. Investment income from pensions, interest from savings, dividends, rentals, and ISAs can be taken into consideration here.

In the UK, you can also give away money or assets during your lifetime without them being subject to IHT upon your death, provided you live for seven years after making the gift. This is known as the ‘seven-year rule’. If you pass away within those seven years, the gift may still be subject to IHT on a sliding scale, known as ‘taper relief’, which reduces the tax owed the longer you live after giving the gift.

Benefits of Gifting

• Reduces your taxable estate: By gifting assets while you are still alive, you can effectively reduce the size of your estate, potentially lowering the amount of inheritance tax owed when you pass away.
• Utilise your Annual Exemptions: The exemptions are on a use them or lose them basis and most cannot be back dated. Familiarise yourself with them and plan how you can make the most of them.
• Support members of your family: Gifting can provide immediate financial support to family members, helping them with expenses like school fees, university fees, house purchases, private medical care or starting up a new business can be the most rewarding sue of your funds. Consider who would inherit your wealth and ask, would it be of more benefit to the recipient in your lifetime..

Considerations around Gifting

• Family dynamics: Consider the potential impact of gifting on the wider family relationships. Open communication and discussion around finances can help prevent future misunderstandings.
• Professional advice:  Always seek advice from your financial planner to ensure that your gifting strategy is in alignment with your overall financial goals.
• Record transactions: Keeping records of any gifts you make can ensure there is no confusion upon death of what happened to your assets. Submissions can even be made to HMRC at the time of the gift. This can help matters when it comes to final settlement of your estate.

Gifting to family members is going to become an essential strategic move to reduce Inheritance Tax liabilities while providing positive financial support to loved ones. By understanding these gifting rules and employing thoughtful planning, you can make informed decisions that benefit both your family and your estate.

Disclaimer

Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.

Please note: This communication should not be read as financial advice. While all possible care is taken in the completion of this article, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by this firm.