Unlocking the Secrets of Gifts and Inheritance Tax: Your Essential Guide

Belgravia Capital
Jun 5
5 min read

Updated: Jun 6

A guide to gifting for inheritance tax mitigation

Gifts and Inheritance Tax (IHT) are topics that often spark concern and confusion among individuals seeking to manage their finances responsibly.

Whether you’re planning your estate or looking to gift assets to loved ones, understanding the intricacies of Inheritance Tax is key to effective estate planning.

In this blog, we’ll explore what you need to know about gifts and Inheritance Tax, while providing valuable IHT advice to help you minimise your tax liabilities.

What is Inheritance Tax?

Inheritance Tax, often referred to as IHT, is a tax that may be applicable to the estate of a deceased person.

It is primarily charged on the net value of the estate, which includes property, money, and possessions, after debts have been paid. In the UK, the standard IHT rate is 40%, applied to the value of the estate above the nil-rate band.

As of 2024, this nil-rate band stands at £325,000.

With careful estate planning, you can strategically manage your assets to reduce any potential Inheritance Tax liability.

Whether it’s through gifts or the utilisation of exemptions and reliefs, effective planning can help protect your hard-earned wealth for future generations.

The Importance of Estate Planning

Estate planning is not simply about preparing for what happens after your death; it’s about making informed decisions to ensure your wishes are honoured, and your loved ones are taken care of.

Here are a few reasons why effective estate planning is crucial:

Minimising Tax Liabilities: Insightful IHT planning can significantly reduce the amount of Tax payable on your estate.
Ensuring Your Wishes are Honoured: A well-structured estate plan ensures that your assets are distributed according to your desires.
Providing Financial Security: Well-planned gifts to loved ones can provide them financial support while ensuring your estate is efficiently managed.
Managing Complex Situations: If you have a blended family or dependents with special needs, careful planning is vital to protect everyone’s interests.

Understanding Gifts and Their Impact on Inheritance Tax

One effective strategy in estate planning is gifting your assets to individuals during your lifetime.

However, it’s essential to understand how these gifts interact with Inheritance Tax. Here are some key points to consider:

Gifts Within Allowances

The UK tax system allows individuals to make certain gifts each year without incurring IHT. These include:

Annual Exemption: You can gift up to £3,000 each tax year without impacting your Inheritance Tax liability. If not used in one tax year, this exemption can be carried forward for one year.
Small Gifts Exemption: You can make gifts of up to £250 per person each tax year to as many people as you wish, without incurring tax.
Wedding Gifts: Gifts made in connection with a wedding or civil partnership can also be exempt from IHT up to a certain amount, depending on your relationship with the couple.

Potentially Exempt Transfers (PETs)

One of the most significant forms of gifting is known as a Potentially Exempt Transfer (PET). If you gift an asset and live for seven years after making that gift, it will not be subject to Inheritance Tax.

However, if you pass away within seven years, the value of the gift will be included in your estate calculations. Considerations for PETs include:

If the value of your entire estate exceeds the nil-rate band, your estate could be liable for tax on the value of the gift.
Gifts made before this seven-year period will still be taxed on a taper relief basis, reducing the tax owed on gifts made closer to death.

Exemptions and Reliefs to Consider

When it comes to IHT planning, knowledge of specific exemptions and reliefs is vital. Some notable exemptions and reliefs include:

Business Property Relief: If you own a business or shares in a business, you may qualify for relief on up to 100% of the value.
Agricultural Property Relief: Agricultural property can also receive substantial tax relief to support the continuation of farming activities.
Charitable Donations: Gifts made to qualifying charities are exempt from IHT, and can even reduce the total rate of Inheritance Tax on your estate.

How to Get Expert Inheritance Tax Advice

Given the complexities surrounding Inheritance Tax, seeking tailored inheritance tax advice from a qualified professional can be invaluable.

Expert advisors can guide you through the intricacies of IHT planning, ensuring that your estate is managed efficiently. Here are some tips on finding the right adviser:

Look for Credentials: Ensure the advisor has relevant qualifications and a good standing in the financial community.
Watch for Specialisation: An adviser who specialises in estate planning and IHT will be more equipped to offer insightful advice.
Ask for Referrals: Personal recommendations can lead you to trusted professionals who have successfully assisted others in similar situations.

The Gift of Life: Planning for the Future

Planning for your future and the future of your loved ones comes with significant benefits, including peace of mind.

While the intricacies of Inheritance Tax may seem daunting, understanding the basics and preparing in advance can dramatically change the financial landscape for your family.

By leveraging the various gifting options, exemptions, and tailored IHT advice, you can significantly reduce tax liabilities and ensure your legacy is preserved.

Remember, the purpose of IHT planning isn’t solely about tax savings; it’s about creating a thoughtful plan that supports your loved ones while honouring your wishes.

As you embark on your estate planning journey, keep in mind that there’s no substitute for expert guidance.

Equip yourself with knowledge and engage with professionals who can navigate you through this important process. Ultimately, ensuring that your assets are passed on efficiently and without unnecessary tax burdens is the best gift you could ever provide for your family.

FAQs

What is Inheritance Tax (IHT)?

Inheritance Tax (IHT) is a tax that may apply to the estate of a deceased person, charged on the net value of the estate after debts have been paid. In the UK, the standard rate is 40% on the value above a nil-rate band of £325,000 as of 2024.

Why is estate planning important?

Estate planning is crucial as it helps minimise tax liabilities, ensures that your wishes are honoured regarding asset distribution, provides financial security to loved ones, and manages complex family situations.

What are the annual gift allowances for Inheritance Tax?

Individuals can gift up to £3,000 each tax year without impacting their Inheritance Tax liability, carry forward unused exemptions for one year, make small gifts of up to £250 to as many people as they wish, and give wedding gifts up to certain exempt amounts.

What are Potentially Exempt Transfers (PETs)?

Potentially Exempt Transfers (PETs) are gifts that become exempt from Inheritance Tax if the giver lives for seven years after making the gift. However, if the giver passes away within this time, the value of the gift may be included in the estate calculations.

How can I get expert advice on Inheritance Tax?

To obtain expert advice on Inheritance Tax, look for qualified professionals with relevant credentials, ask for referrals from trusted sources, and ensure the advisor specialises in estate planning and IHT.