Could gifting from income help you to reduce your estate's Inheritance Tax liability?
Inheritance Tax (IHT) receipts are on the rise, and over the coming years, more families could find themselves needing to pay it after a loved one passes away.
Government figures show that IHT receipts totalled £6.8 billion between April 2023 and February 2024; compared to the same period last year, this is an increase of £0.4 billion.
The increase can be largely attributed to the rising value of properties and assets, coupled with frozen IHT-free thresholds.
While there are several ways you could mitigate a potential IHT bill on your estate, one of the most generous gifting allowances that could help – known as “gifting from income” – tends to be overlooked.
Read on to learn more about how gifting from income could help you to mitigate a potential IHT bill on your estate at the same time as supporting your family financially.
More estates may need to pay Inheritance Tax in the coming years
IHT may be payable when your family inherits your estate after you pass away if it is worth more than £325,000, the nil-rate band. This could increase to £500,000 if you are leaving your home to a direct descendent, because of the residence nil-rate band of £175,000.
You can usually pass your entire estate to your spouse or civil partner free from IHT. When they pass away, you can combine your respective nil-rate band thresholds so that, as a couple, you could pass on up to £1 million free from IHT.
However, these thresholds have been frozen until at least 2028. So, even though IHT only affects a small percentage of households, more estates could become liable for the tax over the coming years as property and asset values rise.
Gifting can enable you to mitigate a potential Inheritance Tax bill
There are a few ways you can give money to friends or family to instantly remove the value from your estate for IHT purposes.
The annual exemption allows you to gift £3,000 a year free from IHT.
You can gift up to £250 to as many people as you’d like, provided they haven’t received a financial gift under your £3,000 annual exemption.
You can gift your child £5,000 for a wedding or civil ceremony. If you’re gifting to a grandchild or great-grandchild who is getting married, this allowance is reduced to £2,500, and £1,000 for anyone else.
Larger gifts, known as “potentially exempt transfers”, could be free from IHT if you live for seven years after giving them. If you pass away sooner than this, the rate of IHT payable on the gift depends on how long it is since the gift was given.
Provided the following criteria are met, you can gift an unlimited amount to your loved ones from surplus income
In addition to the above allowances and exemptions, you can also give unlimited amounts of financial support to friends or family on a regular basis, known as “gifting from income”.
Regular monthly financial gifts may fall under this allowance provided they meet the following criteria:
The funds must come from income – such as employment earnings or pension income – rather than from savings or other types of capital.
The gift must not affect your ability to pay your bills or maintain your standard of living.
These regular gifts, known as “normal expenditure out of income”, could include:
Help for family members with paying their rent, mortgage, or utility bills
Paying into a savings account for a child under the age of 18
Providing financial support to an elderly relative.
You can combine these unlimited gifts with any of the other gifting allowances each tax year except for the small gifts of up to £250 allowance.
This could be a helpful way to mitigate a potential IHT bill on your estate, since, unlike for the other tax rules on financial gifts, there is no cap on the amount that you can gift in this way. You just need to ensure your gifts meet the two aforementioned criteria to be considered exempt from your estate for IHT purposes.
It’s sensible to keep clear and accurate notes about the financial gifts you give throughout your lifetime to help indicate which allowances you have made use of.
Get in touch
If you’d like to learn more about whether your estate might be liable for IHT after you pass away, and the most sensible steps you can take now to mitigate a potential bill, we can help. Our friendly team in Towcester can advise you on this and other financial matters so that you can feel confident about your financial future.
Email theteam@fortitudefp.co.uk or call us on 01327 354321.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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 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.