Increasing numbers using gifts allowance to avoid Inheritance Tax

Increasing numbers using gifts allowance to avoid Inheritance Tax

New figures suggest more and more people are making the most of the Inheritance Tax relief offered on gifts. Here's how you can do it too!

Ruth Jackson

Household money

Ruth Jackson
Updated on 27 February 2016

Taxpayers are increasingly avoiding paying Inheritance Tax by making the most of gifting rules.

Many people know that cash, property and assets given away more than seven years before you die are exempt from Inheritance Tax. But it appears that people are becoming increasingly aware that there is tapered relief on gifts given away three to seven years before you die too.

According to figures from HM Revenue & Customs (HMRC) tax relief on gifts transferred between three and seven years before death was worth £30 million in 2014/15, up from £25 million in 2012/13. And HMRC predicts it will rise to £35 million in 2015/16.

“While the seven-year Inheritance Tax exemption for lifetime gifts is a fairly well-known piece of rudimentary tax planning, there’s an increasing awareness that tapered relief is available if the donor does not live that long,” says James Badcock, head of private client at law firm Collyer Bristol.

Who pays Inheritance Tax?

Inheritance Tax is levied at a rate of 40% if your estate is valued above the tax threshold when you die. This currently stands at £325,000 for individuals, or £650,000 for those who are married, in a civil partnership or widowed. 

From April 2017 a new transferable band will be introduced which applies when a property is passed onto children or grandchildren after death. This will effectively raise the threshold to £500,000 for individuals and £1 million for couples by 2020-21.

For more, read How to cut your Inheritance Tax bill.

Enjoy tax-free returns from the stock market with a Stocks & Shares ISA

What gifts am I allowed to make?

Everyone has a £3,000 limit for gifts each year, which is exempt from Inheritance Tax. If you don't use all of your allocation, you can pass it over to the next year, so you can hand over a total of £6,000.

On top of that figure, you can give away £250 to any number of people every year, while gifts made at weddings (ranging from £1,000 to £5,000, depending on your relationship to the married couple) are exempt too.

For a full guide, head over to How to cut your Inheritance Tax bill

How tax relief is tapered

If you give away assets but die within three years of the gift, and your final estate is liable for Inheritance Tax, then those gifts will be liable for 80% of the Inheritance Tax value. After three years the liability reduces by 20% every year, until it hits zero at seven years.

The fact that more and more Inheritance Tax is being avoided by people making gifts in the final years of their lives shows that people are making the most of this tapered relief. Although it is important to strike a balance between minimising your inheritance tax bill and leaving yourself enough to live on.

[SPOTLIGHT]“A prudent approach to making gifts to loved ones allows even those who are elderly or in ill health to leave as much as possible of their hard-earned savings to family and friends,” says Badcock.

The taper traps to avoid

However, simply giving your money and assets away isn’t enough to keep the taxman from your door. If you are hoping to utilise taper relief, you have to make sure you do it properly, otherwise Inheritance Tax could still be levied.

You have to part with the gift

You can’t just hand something over in name alone. If you want to give your home to your children or grandchildren you cannot continue to live in it, unless you pay them rent.

This also means you can’t simply add another name to your savings accounts, converting them into joint accounts. For it to count as a gift you can’t still access and control the cash.

Watch out for other taxes

Be aware that gifting assets for Inheritance Tax purposes could result in other tax liabilities. For example, if you sell investments in order to hand on the cash you could be liable for Capital Gains Tax.

Document the gift

You need to keep a record of what you have given away, to whom and when. This can be done by having a Deed of Gift drawn up, but that isn’t essential as long as you have kept your own records that your executors will be able to show to HMRC if the taxman decides to check.

Enjoy tax-free returns from the stock market with a Stocks & Shares ISA


Most Recent