6 practical ways you could use gifting to reduce your IHT liability

When it comes to your financial goals, helping your partner, children, or grandchildren out financially could be incredibly important to you. In fact, you may be looking to leave as much of your wealth to your loved ones as possible.

However, it’s worth bearing in mind how any inheritance you leave them could affect the tax liability they may face.

If you’re worried about paying tax on your estate when you die, you’re not alone. According to research by Canada Life, 40% of UK adults say they are concerned about paying Inheritance Tax (IHT). However, 70% of Brits have done nothing to reduce a potential bill.

This is despite International Adviser revealing that 41,000 people were liable for IHT in 2022/23, compared to 33,000 the year before. This equates to a rise of 24% and the highest level in 20 years.

IHT is a tax on the estate, including possessions, money, property, and some lifetime transfers, of someone who has died. However, there is normally no IHT to pay if either the value of your estate is below the £325,000 threshold (the nil-rate band), or you leave everything above this threshold to your spouse, civil partner, charity, or a community amateur sports club.

The fact that the nil-rate band is frozen at £325,000 until 2028, and with house prices and asset values increasing, you may find the value of your estate above the IHT threshold.

So, as Christmas is the season of giving, read on to discover six ways you could gift some of your assets to loved ones to help mitigate any potential IHT.

1. Utilise your gifting allowances

If helping your loved ones out financially is the gift you really want to give them this Christmas, taking advantage of your tax-free gifting allowance could be a prudent strategy.

You benefit from an annual gifting allowance of £3,000 in the 2023/24 tax year. You will also be able to carry forward any unused allowance from the previous tax year. So, if you haven’t used last year’s gifting allowance, you could make a gift of up to £6,000 now that could immediately fall outside the value of your estate.

You can also combine your allowance with your spouse or civil partner. This means that you could pass on as much as £12,000 in a single tax year, if neither of you has used your allowance from the previous year.

2. Gift to someone getting married

Getting married can be an incredibly expensive affair, so your loved one may appreciate it if you gift them some money on their wedding day.

In the process, you could help to reduce any potential IHT liability too.

You can make gifts of up to:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person.

So, if someone you love is getting married soon, consider gifting them some money to go towards their honeymoon fund, a house deposit, or a home renovation project and reduce your IHT liability in the process.

3. Make small gifts of less than £250 that are usually tax-free

With Christmas rapidly approaching, some of your relatives may appreciate some money as a present.

If that’s the case, you could make as many small gifts up to £250 as you like, provided you have not used another allowance on the same person.

While £250 is not a significant sum on its own, making small gifts to your children and grandchildren for Christmas or birthdays could, over time, help to reduce the size of your estate.

4. Gift regularly from your surplus income

You could also consider gifting an unlimited amount of surplus income. As long as the financial gift is made regularly and comes from income without negatively affecting your quality of life, the gifts will not be considered for IHT.

For example, you may regularly provide your loved one with some financial assistance to help them cover university costs or contribute towards some home help for an elderly parent.

It’s important to note that this exemption will only apply where the gifts are made from surplus income after tax.

5. Consider making potentially exempt transfers

Another way to gift is to make a “potentially exempt transfer” (PET). Using a PET allows you to transfer as much of your wealth as you wish and will fall out of your estate for IHT purposes, if you survive for seven years after making it.

Should you die within seven years of making the gift, it may become liable to IHT – but it’s all in the timing.

In the first three years after you’ve made the gift, IHT is taxed at the standard 40% rate if you die. After three years, the rate of IHT tapers on a sliding scale year-on-year until seven years have passed and the gift usually becomes completely tax-free, as shown by the table below:

One of the biggest advantages of using a PET to gift while you’re living is that the person receiving the financial boost may receive it when it’s financially valuable to them.

For instance, gifting to a young adult now could enable them to buy a home, while gifting on your death might mean your children are in their 50s or 60s when they receive their inheritance.

6. Leave a charitable legacy

You may wish to leave some money to a charity that’s close to your heart.

If so, you’re not alone. Indeed, according to data from Investors Chronicle, UK adults leave around £3.9 billion to charities in their wills each year.

If you choose to leave money to a charity in your will, you could reduce the amount of IHT your estate is liable for.

Gifts to qualifying charities are exempt from IHT, no matter the value. Additionally, you may benefit from a lower rate of IHT (36%) if you leave at least 10% of your net estate to charity.

By leaving a charitable legacy, you can help support a cause you care about and help your loved ones pay less tax on their inheritance when you die.

Get in touch

If you’d like to discuss appropriate ways you could protect your wealth from IHT and maximise what you pass on to your family and loved ones, speak to HarperLees’ experienced financial planners.

We use sophisticated cashflow modelling to establish how making gifts now could affect your progress towards your own financial goals, both now and in later life.

In fact, knowing the impact of any gift can give you the peace of mind and confidence to give money to your loved ones without damaging your long-term financial prospects.

Please email info@harperlees.co.uk or call 01277 350560.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.