Gifts & inheritance tax

How gifts can reduce your liability for inheritance tax.

Inheritance tax (IHT) at 40% is due on the portion of a person’s estate that exceeds £325,000. This can be reduced to 36% if 10% (or more) of the estate is given to charity.

Married couples and civil partners can transfer any unused allowance to their spouse, meaning the nil-rate band can potentially double to £650,000.

Although leaving an inheritance has traditionally been a key part of estate planning, attitudes are changing.

Research by Prudential has found that people’s expectations around being able to leave an inheritance have changed significantly in the last 5 years.

28% of people planning to retire this year think they’ll leave an inheritance, compared to 52% in 2001.

Instead, people are choosing to financially support their loved ones while they are alive:

  • 35% already give money to family members
  • the average gift is £250 a month
  • 13% give more than £500 a month.

In most cases (81%) children and their partners are the beneficiaries, though 15% of individuals support their parents.

Seeing your assets being put to use while you are alive can be very rewarding. In addition, gifts can help reduce IHT as most are exempt from IHT if you live for 7 years after making the transfer.

A careful gift-giving strategy can help minimise your liability to IHT and ensure that you leave as much of your estate as possible to your loved ones.

Lifetime gifts

Gifts are not restricted to money - they can include possessions and a loss in value (for example if you sell something for less than its worth, the difference is considered a gift).

Married couples and civil partners who live permanently in the UK can give anything to their spouse without attracting IHT. This means it is possible to reduce the value of an estate by giving assets to a spouse. However, the gift may form part of the spouse's estate when they die so this is not always the most tax-efficient strategy.

Most other lifetime gifts are free from IHT if the giver lives for 7 years after making the transfer.

If you die within 7 years and your estate is worth more than £325,000, tax will be charged on the gifts at the following rates:

Years between gift and death Tax (unless paying the reduced rate)

Less than 3

40%

3-4

32%

4-5

24%

5-6

16%

6-7

8%

There is no limit on lifetime gifts, so they can be a tax-efficient way of transferring assets that you do not need to keep in your estate. It may be advisable to cover substantial gifts by insurance against death within 7 years.

If you continue to benefit from a gift, it will form part of your estate for IHT purposes and the 7-year rule will not apply. For example if you gave a painting to your son but kept it at your home, you would still be considered to be benefitting from it.

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