It’s the season for giving. This Christmas, you might be thinking about how you could improve the security of your loved ones by gifting them money or assets. Read on to discover five potentially useful allowances that you might want to consider if your estate could be liable for Inheritance Tax (IHT).
Some gifts are considered immediately outside of your estate for IHT purposes, and are known as “potentially exempt transfers”. They may be included in your estate when calculating IHT for up to seven years after they are given.
So, if reducing IHT liability is one of the motivators for gifting assets, considering tax-efficient allowances could be valuable.
In 2023/24, the nil-rate band is £325,000. If the entire value of all your assets is below this threshold, no IHT is due on your estate when you pass away. In addition, many people can use the residence nil-rate band if they pass on their main property to direct descendants. For the 2023/24 tax year, the residence nil-rate band is £175,000.
As a result, an individual could leave up to £500,000 to loved ones before IHT is due. You can also pass on unused allowances to your spouse or civil partner.
The nil-rate band and residence nil-rate band are frozen until April 2028.
If the value of your estate exceeds these thresholds when you pass away and you’ve gifted assets within seven years, they may be included when calculating how much IHT is due.
Here are five allowances that could help you gift assets to your family tax-efficiently.
1. The annual exemption of £3,000
Each tax year, you have an “annual exemption”. This stands at £3,000 in 2023/24. You can use this allowance to pass on assets without the value being added to your estate for IHT purposes.
So, if the value of your estate exceeds IHT thresholds, using the annual exemption could reduce a potential bill and provide you with a way to tax-efficiently pass on wealth now.
If you do not use the annual exemption during the tax year, you can carry it forward for one tax year. You may want to make using the annual exemption each year part of your wider financial plan if a possible IHT bill is something you’re worried about.
2. Small gifts worth up to £250
You can also gift up to £250 to as many individuals as you like, as long as they have not already received the whole of your annual exemption in the current tax year. These small gifts will not be subject to IHT.
3. Wedding gifts of up to £5,000 for your child
If you’re celebrating a wedding, you might want to hand over a gift to the happy couple to help them set up a new home or enjoy their honeymoon. The good news is that you can gift £1,000 to newlyweds without the money potentially being added to your estate when calculating IHT.
The tax-efficient allowance rises to £2,500 if it’s your grandchild or great-grandchild getting married, or £5,000 for your child.
So, if you know a couple who will be exchanging vows soon, it could be a good opportunity to reduce your estate’s IHT liability.
4. Gifts that support someone’s living costs
Financial support to help with a loved one's living costs may also be given without worrying about IHT. For example, you might pay for:
Your grandchild’s school fees
Care home accommodation costs of an elderly relative
Living expenses of an ex-spouse.
As the intended purpose of the gift is important for whether it’ll be considered outside of your estate when calculating IHT, it may be wise to keep records of the assets given and how they’ll be used.
5. Regular gifts made from your surplus income
Do you have enough money left from your income after your outgoings to make regular gifts? If the answer is “yes”, it could prove a tax-efficient way to pass on wealth. You may want to make regular deposits into your child’s savings account or support their finances by paying some of their bills.
However, you must:
Be able to maintain your standard of living after the assets have been given
Make regular gifts.
So, it’s important to understand how the gifts could affect your finances and be committed to regular gifting if you’re to do this. The rules can be complex, and you might want to seek financial advice to understand whether it’s the right option for you. Please contact us if you have any questions.
Again, keeping clear records may be useful.
Contact us to talk about how you could mitigate an Inheritance Tax bill
Using gifting allowances is just one way to reduce or mitigate a potential IHT bill. Depending on your circumstances, there may be other steps you could take. Please contact us to talk about your estate plan and how to pass on your wealth to loved ones.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax or estate planning.