What you need to know if you're gifting this Christmas to reduce Inheritance Tax

After much speculation that the Chancellor would scrap Inheritance Tax (IHT) in his 2023 Autumn Statement, on the day, he did nothing of the sort. This means that your estate may still be exposed to the tax, which is typically charged at 40%, and if it is, you may be wondering how to reduce your exposure to it.

One way you may be able to do it is to make gifts to friends and family, and one time of the year that this is particularly popular is of course Christmas. If you’re thinking of giving a generous gift to loved ones this festive season however, you may need to take care.

Read on to discover two vital considerations you must make when making significant gifts to friends and family, and how a financial adviser can help. First though, let’s look at how IHT works.

IHT is charged on your belongings when you die

Some of your assets, such as cash savings, investments, and any property that you own, fall into your estate for IHT purposes when you die. Any element of your estate’s value that exceeds your nil-rate band (NRB) then becomes liable to the tax.

The NRB is the value of assets you’re allowed to have in your estate before IHT is charged. In 2023/24, the NRB is between £325,000 and £1 million depending on your circumstances and whether you’re married or not.

It’s worth remembering that the NRB has been frozen until April 2028, which may mean your estate is more exposed to an IHT liability if the value of your house, investments or other assets increases. As such, reducing your exposure to the tax might be something you need to consider.

One way you could do this is via gifting, although if this is something you’re thinking about, care needs to be taken. Here’s why.

The amount you give must remain within your annual gifting allowance

While the government allows you to make gifts every tax year to reduce the size of your estate, and therefore, your IHT liability, the amount of gifts you can make are limited. In 2023/24, you can gift:

  • £3,000 to one person or shared between many. In certain situations, however, you may be able to boost this to £6,000, or even £12,000 if you’re married.
  • unlimited gifts of up to £250 to as many different people as you like
  • between £1,000 and £5,000 in wedding gifts to specific individuals
  • gifts of any amount from 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 is to live for seven years afterwards. If you have previously made a Chargeable Lifetime Transfer before using a PET, then it may be necessary to look back 14 years before death to assess chargeable gifts.

If you don’t your PET could be liable to a sliding scale of IHT that’s calculated on how long you survive and any other gifts you’ve made.

A financial adviser can help you understand the rules around gifting, particularly if you have made additional transfers or gifts, so that you can maximise the amount you can give away. They will also ensure that you don’t inadvertently create an IHT liability that loved ones will need to deal with later on.

Ensure your gift does not jeopardise your long-term financial security

Making a significant gift to loved ones this Christmas may seem like a good idea, and one that could help to reduce or negate your estate’s IHT liability. There is a catch though, which is that you have to fully relinquish ownership of the assets or cash you give to friends or family.

This means, for example, that you cannot gift investments to children and still receive the dividends from those investments. If you do, HM Revenue and Customs will consider them as part of your estate when you die.

It also means that 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. As such, it’s vital to understand whether or not you can afford to give the gift you’re planning on, and the potential implications it might have on your long-term financial security.

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 gift to loved ones as part of your IHT mitigation strategy and would like to understand the potential implications of doing so, please get in touch. Whether it’s this Christmas or any other time of year, we’ll be happy to help you understand your options and whether gifting is the most appropriate solution if you have an IHT liability.

We can be contacted on 01527 577775, or alternatively, click here to speak to one of our advisers.


Wednesday 20 December 2023