Planning to gift this Christmas? Here’s what you need to know about Inheritance Tax

25/11/2022

As the season of good will draws in, you might be wondering what you’re going to buy for friends and family. If so, you may also be considering giving a cash gift to loved ones this Christmas, something that many parents and grandparents do this time of year.

Giving while you’re still alive has become increasingly popular, research by Aviva suggests. It found that many over-55s would rather gift money to loved ones while they’re still alive as opposed to passing it on after death.

That said, care should always be taken when gifting money, as doing so without proper consideration could result in financial insecurity. For example, research by pension specialists Just Group found that 60% of parents failed to consider care costs when gifting cash to adult children.

Even so, if done properly, gifting could provide you with more control over how the money is used, while also reducing your estate’s Inheritance Tax (IHT) liability. 

So, discover why this is, and how Douglas White could help you reduce, or even negate, your estate’s exposure to IHT so that you can leave more money to loved ones.

You might be able to leave up to £1 million to loved ones IHT-free

In 2022/23, HM Revenue & Customs typically allows you to have £325,000 in your estate before IHT is charged if you’re single. This exemption is known as the “nil-rate band” (NRB). If you’re married, you can combine this sum with your spouse, increasing your total to £650,000.

Additionally, you could also be entitled to the residence nil-rate band (RNRB), standing at £175,000 in 2022/23. This can boost your threshold to £500,000 if you’re single or £1 million if you’re married. Strict rules apply to the RNRB, so check with us to see if you’re entitled to it. 

When he was chancellor in March 2021, Rishi Sunak announced a freeze on the NRB until 2026. At the time, Canada Life said the move could raise an additional £985 million for the government.

This is because investments, assets, and property could continue to increase in value while the tax-free amount you can have in your estate remains static, exposing more people to the tax.

Then in November 2022, chancellor Jeremy Hunt extended the freeze until 2028, something the Telegraph revealed could result in the average household’s IHT bill ballooning.

It reported that it could rocket to £287,000 in 2027/28 thanks to the extended freeze, up from £215,000 in 2019/20.

It’s not all bad news though, as the government provides several legitimate ways to reduce your estate’s exposure to IHT, which is typically charged at 40%. Let’s look at these now.

You can use gifts to reduce your estate’s IHT liability 

Typically, IHT is charged on the value of your estate that’s above the NRB. So, by reducing the overall size of this through gifting, you could lower the value of your estate and bring down your IHT liability. 

If you can reduce it to within your NRB, you will typically negate any tax charge. As a result, Christmas can be a great opportunity to make gifts that ultimately reduce your exposure to IHT. 

In 2022/23, you can gift:

  • Up to £3,000, or £6,000 as a couple, to one person or share it between many each tax year
  • Wedding gifts of up to £1,000 to anyone, £2,500 to grandchildren, or £5,000 to children
  • Up to £250 to an unlimited number of people, provided that they don’t receive any other gifts from you
  • Directly from income. This can be any amount as long as it’s regular, not from capital, and does not lower your standard of living.

If the taxable element of your estate is significant, you may struggle to reduce it by enough using the above gifts. In this situation, you might want to consider a potentially exempt transfer (PET).

This allows you to give unlimited amounts to anybody you like, although you must then live for seven years before the gift falls outside of your estate. If you don’t, it uses up some or all of your NRB for those seven years. 

If the gift exceeds the available NRB, the recipient could face an IHT charge on the excess, which would be calculated using “taper relief”. This is a sliding scale of IHT that’s based on how long you live for after making it and other gifts you’ve made.

If you’re considering a PET, it’s typically best to do so early as possible. Using a PET when you’re aged 65 is much more likely to succeed than when you’re 85.

Other ways to mitigate IHT 

Gifting is not the only way you could reduce your exposure to IHT. Other ways you could achieve it include:

  • Using trusts to pass ownership of assets and cash to beneficiaries
  • Living off savings or investments and passing your pension to loved ones when you die, as retirement funds are typically exempt from IHT
  • Using Alternative Investment Market (AIM) investments, which typically qualify for IHT exemption if you hold the investment for more than two years
  • Making charitable donations. If you donate 10% of your taxable estate, as well as the charitable donation being exempt from IHT, you qualify for a reduced IHT rate of 36% on your taxable estate.

Work with us

As clients of Douglas White, you have peace of mind that you’re working with an experienced, well-qualified financial planner who can help you reduce your exposure to IHT. One of the best ways to do this is to create an intergenerational wealth plan, which allows you to gift your wealth in the most tax-efficient way, safe in the knowledge that your future needs are accounted for. 

An intergenerational wealth plan also provides you with more control, as you can discuss your intentions with your beneficiaries and include conditions that will ensure the gift is used as you would want. 

If you would like to discuss your estate and how we could help reduce an exposure to IHT, or know someone who might benefit from a conversation with us, please get in touch.

Email info@douglaswhiteltd.com or call 0151 345 6828 to speak to us today.

Please note

This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change. 

The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.