Are you maximising inheritance tax savings?

Making gifts, if done correctly, is an effective way to mitigate potential inheritance tax and support your loved ones.

It can also be a complicated area to navigate, as there are multiple allowances, exemptions and rules to consider.

We have answered some of the most important and frequently asked questions for you.

What is the inheritance tax impact of a gift?

Individuals each have an allowance for their assets owned at death that may pass without incurring an inheritance tax liability. This is known as the ‘Nil Rate Band’ which is currently frozen at £325,000 until at least April 2031.

When you die, any gifts made above available exemptions made in the seven years prior to your death may reduce your Nil Rate Band. This means inheritance tax may be due on the value of those gifts up to 40%. The inheritance tax due may apply at a reduced rate, subject to tapering relief, depending on how many years you have survived the gift.

What is classed as a ‘gift’ for inheritance tax purposes?

HMRC considers anything of value to be a gift. This would include family heirlooms, land, paying for a family holiday and of course, cash.

How much can I give away and who to?

Broadly, gifts to a spouse or civil partner are free of inheritance tax so long as there is no mismatch in their UK long-term residence positions.

For other gifts, every individual has an annual allowance of £3,000 which they may give away free of inheritance tax (this is a total annual allowance, not a ‘per recipient’ allowance). You can ‘carry forward’ any unused annual allowance to the next tax year only, meaning you could have up to £6,000 annual allowance in one tax year.

You can also make small gifts of £250 to as many people as you like in a single tax year, but this cannot be used for the same recipient if you also rely on the £3,000 annual exemption for that person.

What about a wedding?

There are special allowances for inheritance tax purposes when giving away money for a wedding:

• Parents can each give their child £5,000
• Grandparents and great-grandparents can each give £2,500
• Any other person can give £1,000

This is in addition to the annual allowance, so in one tax year a grandparent could give their grandchild the full £3,000 annual allowance, as well as £2,500 for their wedding.

Are there exceptions for seasonal gifts?

There is no specific allowance or exemption related to Easter and Christmas gifts.

However, if you intend to make an annual gift, and can show that this will come out of your excess income, not capital reserves, you may be able to claim this as an exemption. To find out more about this exemption, have a look at our recent article.

What about larger gifts?

You can make gifts that are above the exemptions and allowances, provided you survive seven years from the date of making the gift and importantly, do not reserve a benefit. Therefore, if you are thinking about making a larger gift, it is important to consider making this sooner rather than later.

Please note there are other tax considerations to think about when making gifts, such as capital gains tax, and the gifts must be affordable.

Next steps

If you would like to discuss your long-term estate planning goals, including gifting arrangements, please get in touch with our Wills, Trusts and Probate solicitors. Our expertise will ensure you have the confidence to make informed decisions and protect your legacy.