As Christmas is a time for giving, it could be an ideal opportunity to mitigate, or potentially negate, your estate’s exposure to Inheritance Tax (IHT). This might be more important than ever when you consider that the Chancellor, Rachel Reeves, extended the freeze on the nil-rate band (NRB) until April 2030.
This is the amount you’re allowed to have in your estate before IHT is charged. As such, your beneficiaries may be faced with a significantly higher IHT liability if the value of your assets rise while the NRB stays static between now and April 2030.
In addition to this, Reeves also announced that as from April 2027, any unused element of your pension pot will fall into your estate. This could then dramatically increase your estate’s value, which in turn may result in a much higher IHT tax charge for your loved ones to deal with.
With that in mind, using the festive season to make gifts that you can then use to reduce, or potentially negate, your exposure to the tax might be a shrewd financial strategy. If you are though, care needs to be taken as there are strict rules that need to be adhered to.
Before we learn more about two of these rules, we need to consider how IHT works and why gifting could help to reduce your exposure to the tax.
IHT is charged on your belongings when you die
Most assets, including your savings, investments and property, fall into your estate when you die. Any amount that exceeds your nil-rate band (NRB) becomes liable to IHT, which is typically charged at 40%.
As alluded to above, the NRB is the value of assets you’re allowed to have in your estate on death before IHT is charged. Broadly speaking, in 2024/25, the NRB is between £325,000 and £1 million depending on whether you’re single, married or in a civil partnership, or whether you own a home that you intend to leave to a direct descendent.
By gifting, you may be able to reduce the value of your estate, and with it its exposure to IHT. If you gift enough to lower the value of your assets to within your NRB, then IHT would not normally be charged.
The amount you give must remain within your annual gifting allowance
The government allows you to make gifts every tax year to reduce the size of your estate, and with it, any IHT liability it may have. Yet in 2024/25, the amount you can give away is limited to:
- £3,000 to one person or shared between many. In certain situations, you may be able to carry this forward meaning you could gift £6,000 the following tax year, or even £12,000 if you’re married
- unlimited gifts of up to £250 to as many different people as you like. Please note that if the total amount of gifts made to the same person exceeds £250, this exemption no longer applies
- between £1,000 and £5,000 in wedding gifts to specific individuals
- gifts of any amount from monthly income, as long as they’re made regularly and don’t reduce your standard of living.
You could use a potentially exempt transfer (PET) to make larger gifts to anyone you like, which could help you significantly reduce the size of your estate. The only criteria you’ll need to meet for the PET to fall outside your estate for IHT purposes is to live for seven years after making it.
If you don’t the PET could become liable to IHT, which would be calculated using a sliding scale based on how long you lived for after making it.
Ensure your gift does not jeopardise your long-term financial security
It’s critical to remember that when you gift assets or cash, you must fully relinquish ownership of them. If you don’t, they will remain in your estate for IHT purposes.
This means it’s important to make sure that you’ll be financially secure without the money or assets you’re gifting. For example, if in the future you can no longer maintain your standard of living, you cannot demand the money back from those you have given it to.
A financial adviser can help you to understand the potential effects that gifting might have on your future, whether it’s the right option for you, and the risks you may face if you go ahead.
Get in touch
If you’re thinking about making a substantial gift as part of your IHT mitigation strategy and would like to understand the potential implications of doing so, please call us on 0333 010 0008. We can arrange a no obligation meeting with one of our advisers who will explain the options available to you and whether gifting is something you should consider.
23 December 2024