Inheritance tax gifting – the efficient way #1

Navigating the complexities of inheritance tax can be challenging especially when considering the most efficient methods for gifting to family or loved ones. In this, the first Blog of a series, we look at some of the tools available. It is essential to understand the various reliefs and exemptions available under UK law to minimise the potential tax impact of such gifts.

Understanding inheritance tax on gifts

Inheritance tax (IHT) in the UK may apply to gifts made during a person's lifetime, particularly if the donor does not survive for seven years after making the gift. However, several exemptions and reliefs can mitigate the tax liability.

Key exemptions and reliefs for gifting:

1. Annual exemption - individuals have an annual exemption of £3,000 for gifts. If unused in one year, this exemption can be carried forward to the next year, potentially allowing for a £6,000 exemption in the following year

2. Small gifts exemption - gifts of up to £250 per recipient per tax year are exempt, providing a way to give small amounts to several people without attracting IHT

3. Wedding or civil partnership gifts - gifts given on the occasion of a marriage or civil partnership can be exempt up to certain limits, depending on your relationship with the recipient

4. Normal expenditure out of income - regular gifts made from your income (not your capital) that do not affect your standard of living can be exempt from IHT

5. Gifts to charities and political parties - gifts to registered charities, museums, universities, or political parties are exempt from IHT.

Strategies for effective gifting

Utilising annual exemptions

By effectively using the annual exemption, you can reduce the value of your estate for IHT purposes. When you start making gifts that aren’t caught by the seven year rule, you can make £6,000 in the first year and £3,000 every tax year after. This is an annual gift limit and if you could make gifts of £6,000 and have four children you would like to gift this amount to, you can make gifts to each of £1,500.  If the following year if you wish to make the gift again this amount would reduce £750 each and every year thereafter.

Individual Gifts - £250 limit per individual

This gift relief is in addition to the above gifting and is per personal tax year. This means you can gift a further £250 to your children, grandchildren or nieces and nephews for example, but you should not add it to the gift when making these. They should be made separately to gain the full relief. Therefore, if you have four children and six grandchildren, you can make gifts of £2,500 in total per year.

Gifts on marriage

These are exempt if up to £1,000 in all circumstances, or of up to £5,000 if made to your children by a parent and up to £2,500 if made by a grandparent to your grandchild.

Normal expenditure out of income

Also known as regular gifts made from surplus income.  If you are unable to spend your income for the year and receive surplus income to your usual needs, you can set up to gift this regular monthly, quarterly or annually. This can be to anyone but is usually grandparents to grandchildren or to your children.

Keeping a gift log

It is beneficial to keep a log of all your exempt gifts so that it is clear they should not be included in any estate calculation on your death. It is advisable to share this information with  your executors, children and solicitor (to hold with your will), or accountant -  to make sure all are aware.

Seeking Professional Advice

Given the complexities surrounding inheritance tax and gifting, it's recommended to consult with a tax professional or financial advisor for personalised guidance and to ensure compliance with current tax laws and regulations.