Inheritance Tax (IHT) has been a hot topic recently, with Labour’s new policy suggesting that more estates could face this tax in the future. If you’re keen to reduce the tax burden on your estate, there are several legal strategies to explore. One of the simplest – and often overlooked – is giving money to your loved ones during your lifetime.

Let’s explore how gifting can help you manage IHT while bringing joy to your family and friends.

Why Giving Away Money Makes Sense

We all know the joy of surprising someone with a meaningful gift. But did you realise that gifting money could also reduce the tax liability on your estate? It’s true! By gifting within specific guidelines, you can support your loved ones while trimming down what might otherwise go to the taxman.

However, as straightforward as gifting may seem, it’s worth understanding the rules to ensure your generosity is as tax-efficient as possible.

Rules to Know Before Gifting

Before you start handing out cheques, it’s important to get to grips with a few key rules surrounding gifting for IHT purposes. These guidelines ensure that your gifts won’t inadvertently create complications for your estate or your beneficiaries.

1. Annual Exemption

Each tax year, you can give away up to £3,000 without it counting towards IHT. If you don’t use this allowance in one year, you can roll it forward for one additional year, doubling your exemption to £6,000.

2. Small Gifts Exemption

If you’re the generous sort, you’ll be pleased to know you can make smaller gifts of up to £250 per recipient – and there’s no limit on the number of people you can gift this amount to. These are entirely exempt from IHT, as long as the recipient hasn’t also benefited from your £3,000 annual exemption.

3. Wedding and Civil Partnership Gifts

Weddings and civil partnerships are joyous occasions – and a great time to be generous. You can gift up to:

• £5,000 if you’re a parent
• £2,500 if you’re a grandparent or great-grandparent
• £1,000 if you’re any other relative or friend

These gifts are completely exempt from IHT, as long as they’re made before the big day and the ceremony goes ahead.

4. Gifts Out of Normal Expenditure

This rule lets you make regular gifts out of your surplus income, provided it doesn’t impact your ability to maintain your usual lifestyle. For example, if your monthly income comfortably covers your expenses and leaves room for discretionary spending, you can gift the surplus without it affecting your IHT liability.

5. The Seven-Year Rule

Larger gifts – those that exceed the exemptions above – fall under the “seven-year rule.” If you survive for seven years after making the gift, it won’t be counted towards your estate for IHT. However, if you pass away within seven years, the gift may be subject to tax on a sliding scale known as taper relief.

6. Potentially Exempt Transfers (PETs)

Larger gifts not covered by the exemptions are referred to as Potentially Exempt Transfers (PETs). While they can eventually become IHT-free if you live for seven years after making them, PETs require careful planning to avoid unintended tax consequences.

7. Exempt Beneficiaries

Certain recipients – such as your spouse or civil partner, if they have permanent UK domicile – can receive gifts free from IHT at any time. This exemption also applies to charities and some national institutions, making them an excellent choice for philanthropic giving.

The Emotional and Financial Benefits of Gifting

Giving money to loved ones can be a deeply rewarding experience. Instead of waiting for your estate to be distributed after your death, you can see the impact of your generosity during your lifetime. Whether it’s helping a grandchild with university fees, contributing to a family member’s first home deposit, or funding a dream wedding, your gifts can create memories that last a lifetime.

Financially, gifting allows you to take control of your estate and reduce the IHT liability that might otherwise fall on your beneficiaries. It’s a win-win for everyone involved.

Ready to Take Action?

If you’re considering gifting as part of your IHT planning, it’s worth getting professional advice. A financial adviser or tax specialist can help you navigate the rules, ensuring that your gifts are structured in the most efficient way possible.

Remember, gifting isn’t just about reducing tax – it’s about sharing your wealth in a meaningful way. Whether you’re helping family members get a head start or supporting causes close to your heart, the impact of your generosity can be priceless.

Take the first step today and explore how gifting can fit into your estate planning. It might just be the simplest – and most satisfying – financial decision you’ll ever make.