Q: I’ve reached that stage in my life where I need to think about my estate and the amount of inheritance tax that may be paid on it. I’ve heard that gifting money before I die is free of IHT. Can you please explain how this works?
A:Certainly. You can use the “gifts out of surplus income” rule to help reduce your IHT bill. Less than two percent of estates that have paid IHT have used this rule in the past three years, but this is likely to increase when pensions become subject to IHT from April 2027.
As you are probably aware, IHT is paid on your estate when you die, with some exceptions. For example, no tax is due if your estate is worth under £2 million and is left to your spouse or civil partner and if you leave your primary property to your children or grandchildren, no tax is paid on the first £500,000 worth. For every £2 your estate exceeds £2 million, the residence nil-rate band decreases by £1.
Another exception is that of gifting. Any gifts you make over seven years (a maximum of £3,000 per year) prior to your death incur no tax (unless it is part of a trust). Anything gifted less than seven years before you die may be subject to IHT on a sliding scale. However, these gifts must be proven to be part of the transferor’s normal expenditure (in other words, regular rather than one-off payments), paid out of their income (not capital like savings) and leave them with enough income to maintain their normal standard of living.
If you’d like to discuss the matter further, please get in touch with our team.
