Inheritance Tax Gifting Rules: Essential Tips in Light of Rising HMRC Receipts

Recent HMRC statistics have revealed a startling £700 million increase in inheritance tax (IHT) receipts this April, highlighting a growing financial burden on many estates. This surge is largely attributed to rising property values and asset prices, which are pushing more estates into the taxable bracket.

Understanding and effectively utilising IHT gifting rules can significantly impact the tax liability of your estate. To help understand these regulations, finance expert Gary Hemming from ABC Finance breaks it down.

You can give away up to £3,000 each tax year without it being added to the value of your estate. If you didn’t use your full allowance the previous year, you can carry it forward, potentially giving away £6,000 tax-free.

Small Gifts Exemption

You can give up to £250 to any number of people each tax year, as long as they haven’t received part of your £3,000 annual exemption.

Wedding or Civil Partnership Gifts

Parents can give £5,000, grandparents or other relatives can give £2,500, and anyone else can give £1,000 tax-free.

Regular Gifts Out of Income

Gifts that are part of your regular expenditure, such as Christmas or birthday presents, can be exempt if they are made from your surplus income and do not affect your standard of living.

Potentially Exempt Transfers (PETs)

Gifts of any amount made more than seven years before your death are generally exempt from IHT. If you die within seven years of making the gift, it becomes taxable, though taper relief may reduce the tax due.

Gifts to Spouses and Civil Partners

Gifts between spouses or civil partners are generally exempt from IHT, provided they both live in the UK.

Important Considerations

Documentation: Keep detailed records of all gifts, including dates, amounts, and recipients. This will help your executors and HMRC assess the correct IHT liability.

Seven-Year Rule: If you plan on making substantial gifts, be mindful of the seven-year rule. Gifts made within seven years of death could be subject to IHT.

Gifts Out of Income: Ensure that gifts out of income do not affect your standard of living. Regular gifts should ideally come from surplus income and not from your capital.

Use of Exemptions: Make full use of annual exemptions and other reliefs each year to reduce your estate’s IHT liability.

Legal Advice: Consider seeking professional advice, especially for large estates, as the rules can be complex and planning needs to be tailored to individual circumstances.

Proactive Estate Planning Steps

Given the recent increase in IHT receipts, proactive estate planning is crucial. Here are some steps you can take:

Review Your Estate Regularly: Regularly review the value of your estate and your estate planning strategies to ensure they remain effective and up-to-date with current laws and tax thresholds.

Utilise Trusts: Trusts can be an effective way to manage your estate and potentially reduce IHT liability. They allow you to control how and when your assets are distributed.

Consider Life Insurance: Taking out a life insurance policy written in trust can provide funds to pay IHT, ensuring your beneficiaries receive their inheritance without needing to sell assets.

Make Gifts Early: If you are considering making gifts, do so as early as possible to take advantage of the seven-year rule.

Seek Professional Advice: Engage with a financial advisor or estate planner to explore all available options and ensure your estate planning is tax-efficient.

Gary Hemming, a finance expert from ABC Finance, says:

“Understanding and leveraging the IHT gifting rules can significantly impact the amount of tax your estate may be liable for. With the recent increase in IHT receipts, being proactive in your estate planning is more important than ever. By utilising exemptions, making regular gifts, and seeking professional advice, you can better manage your estate and potentially reduce the IHT burden on your beneficiaries.”