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Gifting vs. leaving an inheritance

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.

The UK has a notoriously complex system when it comes to inheritance tax (IHT). In 2021-22, this levy is certainly significant; typically standing at 40% on the value of assets (in an estate) over £325,000. One possible way around this is through “gifting exemptions” such as the “Seven Year Rule”, which means that your gift to someone will not be counted as part of your estate if you survive another seven years. However, can you rely on this approach to mitigate a future IHT bill? Are there other gifting options which may be more effective?

In this article, our team at Castlegate (financial planners in Lincolnshire) offer some answers to these important questions. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:

01476 855 585


Gifting & UK inheritance tax rules

To understand how gifting could benefit an individual (or couple) looking to reduce IHT on their estate, it is important to understand how the broad system works. In 2021-22, an individual is not charged IHT if their estate is valued under £325,000 upon death. For a married couple or civil partnership, this threshold rises to £650,000 since their individual thresholds are combined. On top of this, each person is also entitled to a Residence Nil Rate Band (RNRB) which lets him/her pass down another £175,000, tax-free, if the family home is inherited by grandchildren, children or other “direct descendants”. Taken together, this could allow a married couple or civil partnership to pass down a £1m estate to their beneficiaries one day, tax-free.

With this picture in mind, sometimes gifting rules do not need to be explored to mitigate IHT – since the total value of the estate could fall within these thresholds when death of the owner(s) occurs. However, what if your estate exceeds these limits? For instance, a single person who owns a £300,000 house and with £300,000 in savings/investments (outside of a pension or ISA) may be due a £110,000 IHT bill in the future (£275,000 x 0.40), assuming they leave nothing to direct descendants or to charity. Could gifting assets over the years help reduce this bill?


How UK gifting rules work

The UK tax system allows you to make certain gifts during your lifetime which are not counted as part of your estate (for IHT purposes) when you die. As mentioned above, the Seven Year Rule allows your gift to be exempt from IHT if you survive it by seven years. If you die within that period, however, then the gift may be taxed – perhaps by a lower rate, depending on when the gift was made. Apart from this, each individual is entitled to an “annual exemption” which allows you to make gifts up to a total of £3,000, each year, which are free from IHT. You can make one gift to one person or multiple smaller gifts to many people, provided the total is under £3,000. If you do not use your full annual exemption in a tax year, then you can “carry over” any unused amount to the next tax year – but not into following tax years.

There are also other IHT exemptions for certain gifts. In particular, you can give up to £5,000 to a child for their wedding, £2,500 for a grandchild’s wedding and £1,000 to anyone else. You can also give away as many £250 gifts as you like to different people within a tax year (i.e. the small gift allowance). Taken together, these gift exemptions can add up to a significant sum over many years – opening up the opportunity for a big IHT saving for many people, with careful planning.


Other IHT mitigation options

Beyond the UK gifting rules and IHT thresholds, there are other tax mitigation tools available in 2021-22 which may also be useful. In particular, pension pots are currently not counted as part of a deceased person’s estate, making them exempt from IHT. For certain schemes, if the estate owner dies before their 75th birthday, then no tax should be due at all. If they die after this, however, then any pension funds inherited by beneficiaries will fall under Income Tax.

Here, careful financial planning may be needed, as this could unintentionally push your loved ones into a higher tax bracket. Finally, there are also investment vehicles which can be helpful for lowering a future IHT bill. For instance, if you hold Enterprise Investment Scheme (EIS)-qualifying shares for at least three years then these are exempt from IHT when you die. Another option is to consider holding shares directly in companies which qualify for Business Property Relief (BPR), which is available at 50% or 100% depending on your status and circumstances.


Conclusion & invitation

If you are interested in discussing your own financial plan or IHT strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585