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Smarter gifting for IHT

Gifting assets during your lifetime can be an effective way to reduce your estate’s exposure to Inheritance Tax (IHT). In most cases, gifts are treated as Potentially Exempt Transfers (PET’s) and fall outside of your estate for IHT purposes if you survive for seven years after making them.

The good news is that there are several exemptions available which, when used correctly, allow you to pass on wealth in a tax efficient way without the need to survive seven years.

Annual exemption

Each individual can gift up to £3,000 per tax year free of IHT. If unused, this can be carried forward for one year, allowing up to £6,000 of gifts in a single year.

Small Gifts Allowance

You can give up to £250 per person per year to as many individuals as you like, provided no other exemption is used for the same recipient.

Gifts from surplus income

Regular gifts made out of surplus income are immediately exempt from IHT, as long as they:

• Are paid from your regular monthly income

• Do not reduce your standard of living

This is often an overlooked but highly effective planning tool. It can be particularly useful where for example, a farmer is still actively farming and earning a good income, but is also receiving pension income that is not needed for day to day living.

This can also be useful tool for grandparents/parents wishing to contribute towards school or university fees.

Gifts on marriage

Special allowances apply for wedding gifts:

• £5,000 to a child

• £2,500 to a grandchild

• £1,000 to others

Why it matters

While these exemptions may seem modest in isolation, using them regularly can make a real difference over time, gradually reducing the value of your estate without creating an immediate IHT charge.

Everyone has a nil rate band of £325,000 for IHT purposes. While the focus is often on ensuring farming and business assets qualify for Agricultural Property Relief (APR) and Business Property Relief (BPR) reliefs, it’s just as important to think about assets held outside of these reliefs. If these exceed the nil rate band, they could become taxable, so thinking ahead is key.

A bit of forward planning can go a long way and getting the right advice can help you make the most of what’s available.