Lifetime gifting is a powerful estate planning tool that can help reduce your inheritance tax (IHT) liability.
By taking advantage of certain exemptions and allowances, you can give away assets during your lifetime while benefiting from tax savings.
In this guide, we explore some of the key gifting exemptions that everyone should consider when planning their estate.
(Read Time: Approx. 4 minutes)
Topics Discussed:
- Utilising exemptions like the annual gifting allowance to reduce IHT
- The importance of strategic gifting to manage long-term inheritance tax obligations
The Annual Exemption
One of the most straightforward ways to reduce your IHT liability is by using the annual exemption.
This exemption allows you to gift up to £3,000 per tax year to any individual or trust without the gift being subject to IHT.
The beauty of this exemption is that the gifted amount immediately falls outside of your estate, meaning it won’t be included in the value of your assets for IHT purposes.
If you’ve neglected to use this exemption in previous years, you can carry it forward for one year, allowing you to give up to £6,000 in total.
For married couples, each person has their own £3,000 exemption, effectively doubling the potential tax-free gifts to £6,000 annually.
Over time, this can result in significant IHT savings, particularly for larger estates.
While £3,000 may not seem much when compared to estates worth millions, the cumulative effect of annual gifting, when used consistently over several years, can make a substantial difference.
The £250 ‘Small Gifts’ Exemption
Another useful exemption is the £250 small gifts allowance, which lets you give up to £250 to as many people as you like each year.
These gifts are exempt from IHT, but there are limitations.
For instance, you can’t combine the small gifts exemption with other exemptions, such as the £3,000 annual exemption.
Additionally, any gift exceeding £250 in value does not qualify for this allowance.
Although the small gifts exemption might seem limited in its impact, if used effectively, it can help reduce the overall size of your taxable estate.
Particularly for those with large families or extended networks of friends, making small, regular gifts can add up over time.
Gifts Out of Regular Income
The gifts out of regular income exemption are arguably the most valuable, yet often misunderstood, IHT exemption.
Unlike other exemptions, there’s no upper limit on the value of gifts you can make, provided certain conditions are met.
To qualify for this exemption, the gift must come from your regular income, must be part of a pattern of giving (i.e., made on a regular basis), and must not reduce your standard of living.
This exemption can be especially useful for those with substantial income from pensions, dividends, or investments, allowing them to pass on wealth without any IHT implications.
However, it’s crucial to ensure that the gifts are made from income rather than capital, and maintaining detailed records is vital to avoid complications with HMRC.
Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs)
In addition to the standard exemptions, larger gifts may also be classed as Potentially Exempt Transfers (PETs) or Chargeable Lifetime Transfers (CLTs).
PETs apply to gifts made to individuals, and if you survive for seven years after making the gift, it falls entirely outside your estate for IHT purposes.
If you pass away within seven years, the value of the gift will be considered part of your estate, though taper relief may reduce the tax liability if you survive at least three years after the gift.
CLTs, on the other hand, typically apply to gifts made into most types of trusts.
These transfers are immediately chargeable if the value exceeds the available nil rate band (£325,000), but as with PETs, surviving for seven years will remove the gift from your taxable estate.
By carefully structuring larger gifts as PETs or CLTs and ensuring you survive the seven-year period, it’s possible to significantly reduce the taxable value of your estate.
Summary
Lifetime gifting is a highly effective way to manage inheritance tax liabilities and ensure that more of your wealth is passed on to your loved ones rather than being taxed by HMRC.
Whether through utilising the annual and small gifts exemptions or taking advantage of the gifts out of regular income exemption, there are multiple strategies available to reduce your IHT burden.
For those considering larger gifts, careful planning around PETs and CLTs can further mitigate the impact of IHT, though it’s important to ensure that you can afford to make these gifts without compromising your financial security.
If you’re ready to explore how lifetime gifting can fit into your estate planning strategy, reach out to Help Me Legal today.
Contact Help Me Legal today at 01772 282768, fill in our contact form here, or reach out via our 24 hour WhatsApp at +447816848188.