The Gift of Gifting

Following the autumn Budget, it is clear the Labour government has identified Inheritance Tax (IHT) as a potential revenue boosting tax. Changes to the relief on AIM stock and Business/Agricultural Property Relief has meant these vehicles are no longer the IHT havens they used to be. When you factor in the inclusion of pensions into a death estate, it is undoubtedly becoming more and more difficult to escape the grasps of the UK tax system.

However, one area that often goes unnoticed is simply making use of your tax-free annual allowances. This is particularly important for those with estates that exceed their nil rate band which in the UK, is currently £325,000. When you include the residence nil rate band (£175,000) and any tax-free bands transferred from a deceased spouse, the maximum tax-free amount a death estate can hold is £1,000,000. Any cash gifts made under your nil rate band will not be chargeable to IHT on death.

For those with estates surpassing these bands, gifting cash can be an effective way to reduce IHT liabilities, but it’s important to understand the specific exemptions and allowances that apply under UK law.

Detailed below are the various gifts allowed for the purposes of tax-free gifting. Any cash gifts exceeding these are known as lifetime gifts and are potentially exempt of transfers (PETs), meaning they will only become chargeable to IHT if the donor is to die within seven years of the gift. Any gift that is not exempt or a PET is known as a Chargeable Lifetime Transfer (CLT) and includes any gifts into a Discretionary Trust or a Company. These can attract an immediate tax charge of 20% however for the purpose of this article, we are solely focusing on the exempt and potentially exempt gifts.

Gifts that fall outside the scope of IHT include the following.

1. Annual exemption:
   Each individual can give away up to £3,000 worth of gifts each tax year without incurring IHT. This exemption can be carried forward one year, allowing a maximum of £6,000 to be gifted if the previous year’s allowance was unused.
2. Small gifts exemption:
   Gifts of up to £250 can be made to any number of recipients each tax year, as long as the donor hasn’t used their £3,000 annual exemption on the same person. This allows for multiple small gifts to be made without IHT liability.
3. Gifts out of income:
   Gifts made from surplus income are exempt from IHT, provided they do not affect the donor’s standard of living. These gifts must be regular and not one-off donations.
4. Gifts for weddings or civil partnerships:
   There are specific exemptions for gifts made for weddings or civil partnerships, with limits depending on the relationship to the recipient:
   £5,000 from parents to a child
   £2,500 from grandparents or great-grandparents to a grandchild
   £1,000 from anyone else.
5. Charitable donations: Gifts made to registered charities are fully exempt from IHT, and they can also reduce the taxable estate. Additionally, if at least 10% of the estate is left to charity, the IHT rate on the remainder of the estate is reduced to 36%.

Cash gifts exceeding these allowances are potentially exempt and can attract ascending levels of relief, determined by the time in between the gift being made and the death of the donor. The below table details the relief and effective tax rates that would be applicable to donors following a lifetime gift in the event of their death. It’s worth highlighting that the donor only needs to survive three years to effectively pay a reduced rate of IHT.

Careful planning and taking advantage of these allowances and reliefs can significantly reduce the IHT burden. Additionally, there are broader solutions to address increasing IHT concerns. However, as the rules around gifting can be complex, seeking professional advice is often advisable to ensure the most tax-efficient approach.