At the end of a long life, your estate becomes one way to create a lasting legacy. It allows you to leave your wealth and assets to your loved ones – giving them a boost that could help them to overcome financial challenges they might face in their lives.
However, if you don’t handle your estate plans in a tax-efficient manner, your loved ones could be left with a hefty Inheritance Tax (IHT) bill to pay once you’re gone.
According to FTAdviser, IHT receipts rose by approximately £1 billion year-on-year between the 2021/22 and 2022/23 tax years. The total IHT receipts for 2022/23 totalled £7.1 billion — a record-breaking intake for HMRC.
So, with that in mind, what steps could you take to help reduce your IHT liability and leave your loved ones in a better place once you’re gone?
One useful way to achieve your goal might be gifting, which could allow you to pass on your wealth to your loved ones while you’re still alive, free of IHT. Here are five ways you could opt to gift, while seeing your wealth put to good use in improving the lives of your family and friends.
- You could take advantage of your annual exemption
IHT is typically payable at a rate of 40% on the value of your estate above the nil-rate band threshold. The nil-rate band stands at £325,000 for the 2023/24 tax year, or £650,000 if you are married or in a civil partnership, as long as the first person to pass away leaves all of their assets to their surviving spouse.
In addition to this, the “residence nil-rate band”, which applies if you leave your home to children or grandchildren, could boost your tax-free allowance to £500,000 for a single person and £1 million for a married couple.
Typically, once you’ve breached the threshold, your estate will become liable for IHT. So, taking advantage of the rules of gifting to reduce your potential liability could be a smart move.
Each year, you are entitled to a gifting exemption – £3,000 in 2023/24 – and can roll over any unused amount from your previous year’s allowances.
This is an individual exemption, so if you’re part of a couple, your annual exemption essentially doubles, and you could collectively gift £6,000 each year (or more with roll overs).
- You might choose to make small gifts of £250 or less
Gifts up to and including £250, made to anyone, are usually not subject to IHT.
Additionally, they do not typically form part of your £3,000 annual exemption.
This allows you to gift presents to your children, grandchildren, or friends – such as for Christmas, work events, or birthdays – up to £250 on each occasion without the gift forming part of your eventual estate.
If you have a large family and a lengthy list of friends, it could be a great way of putting your wealth to good use. A financial gift could make the people you care about very happy and allow them to make positive memories or reduce potential money worries.
- You could gift at a wedding or civil union
A wedding or civil union can be a joyous time, especially if it’s for your child, grandchild, or a close friend. And this provides another useful way you could gift your wealth while benefiting from an IHT exemption.
A gift to a couple on their special day will typically fall outside your estate for IHT.
The amounts you could gift up to are as follows:
- Up to £5,000 to a child
- Up to £2,500 to a grandchild or great-grandchild
- Up to £1,000 to another family member or a friend.
Your gift could possibly help the happy couple pay for honeymoon costs or contribute towards the deposit for their first family home.
- You might want to gift directly from your income
An additional IHT exemption arises from gifts made as “normal expenditure out of income”.
This refers to regular gifts from your income, such as:
- Contributing to your children or grandchildren’s savings, such as a Junior ISA
- Helping loved ones with their monthly rental costs
- Supporting a sick relative with the cost of their care.
These gifts could be free from IHT as long as they meet the qualifying criteria:
- They come directly from your income
- They are part of your normal outgoings and are paid in regular amounts at regular intervals
- They don’t affect your standard of living.
The vague nature of some of the defining criteria can make it difficult to claim this IHT exemption.
As a result, it is essential that you keep detailed records and that your intention to claim it as a gift is in writing to make any calculations easier on the executor of your estate.
These accurate records should include:
- The date of the gift
- The beneficiary
- The amount that you gifted.
- You could gift any amount as long as it follows the “seven-year rule”
The “seven-year rule” could allow you a lot of flexibility and freedom over the kind of gifts you choose to make. In theory, it allows you to gift any amount to anyone you like without being liable for IHT.
To qualify for the exemption, seven years must pass between the date of your gift and the day you die. Providing this happens, your gift typically won’t be subject to IHT.
However, if you die within the seven-year window, your gift may become a “chargeable transfer”, which could see your estate become liable for IHT.
The amount of IHT payable reduces between years three and seven. So, the longer you live following your gift, the less tax your loved ones might have to pay.
This gradual reduction in rates over time is known as “taper relief” and is detailed in the table below:
| Years between gift and death | IHT payable |
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| More than 7 | 0% |
It is important to remember that taper relief only applies to gifts made in excess of the nil-rate band. Up until that point your gifts will already be exempt from IHT.
Read more: Why discussing your estate plans with loved ones might give them peace of mind
Get in touch
If you have lingering concerns about your estate plans and the possibility of a hefty IHT bill being left to your loved ones, it may be worth seeking out expert advice to ensure steps are taken to reduce any potential liability.
To discuss your plans and learn more about how gifting might benefit you, please reach out by email at beyourself@murphywealth.co.uk or give us a call at 0141 221 5353.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
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.
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