With property prices increasing and Inheritance Tax (IHT) allowances frozen until at least 2028, it’s likely that IHT bills will continue to rise with more families finding their estates are subject to IHT. But there are many IHT planning opportunities available, such as making gifts, that can help you to protect your estate from paying unnecessary tax.
Current IHT allowances
IHT is generally payable at 40% on the value of an estate on death. However, everyone has a nil rate band and an additional residence nil rate band provided their qualifying residence is left to a direct descendant (child or grandchild). The nil rate band of £325,000 and the IHT residence nil rate band of £175,000 remain unchanged and are frozen until April 2028.
Making the most of the lifetime gifting allowances
When you make a gift to another individual it is a Potentially Exempt Transfer (PET) for IHT purposes. No IHT is payable at the time you make the PET and, if you live for seven years after making it, the PET is exempt from IHT on your death, subject to the gift with reservation rules.
However, if you die within seven years of making the PET, it becomes chargeable on your death for IHT. PETs use your nil rate band first, so there is only IHT payable on the PET if it exceeds the nil rate band available, even though it will reduce the amount available to offset against your other assets at the date of death.
However there are allowances and exemptions available that can result in a gift not being chargeable to IHT, even if you die within seven years of making it.
- Annual exemption
This exemption allows the first £3,000 gifted in each tax year to be exempt from IHT, regardless of how long you live for.
Any unused annual exemption from the previous tax year can be carried forward by one tax year only. Therefore, the maximum amount you can have available at any one time is £6,000.
- Small gifts exemption
You can also gift up to £250 to as many individuals as you like in any one tax year. For example, if you had 10 grandchildren, you could still gift £250 to each grandchild and those gifts would be exempt. These small gifts do not use the £3,000 annual exemption.
- Gifts out of income
This exemption applies if you have surplus income after all your regular outgoings have been paid. For the gifts to be exempt:
- the gifts must be from surplus income and not capital.
- the gifts must be regular and not a one off.
- after making the gifts, you must have enough income to maintain your usual standard of living.
Your executors will have to provide detailed information to HMRC regarding your incomings and outgoings to claim this exemption when you die. Therefore, it is sensible to keep up to date records that match the information required by HMRC.
Life insurance premiums and regular pension contributions are treated as gifts out of income.
- Gifts made in contemplation of marriage or civil partnership
Lifetime gifts to (or for the benefit of) a couple entering a marriage or civil partnership are exempt up to:
- £5,000 to a child.
- £2,500 to a grandchild or great-grandchild.
- £1,000 to anyone else.
- Gifts to charity
Any gift to a registered charity (made either during your lifetime or in your will) is exempt from IHT. If you leave at least 10% of your chargeable estate to charity upon your death, the rate of IHT payable will be reduced from 40% to 36%.
Speak to an Origen adviser about your IHT plans
Many people do not plan ahead, potentially leaving their beneficiaries with larger than expected IHT bills. Most of the planning opportunities available involve gifting assets during your lifetime. So it’s best to start putting your plans in place sooner rather than later to ensure that your estate’s IHT bill is kept to a minimum and you can pass on more of your wealth tax efficiently.
Ask your Origen adviser or contact our Client Services Team to find out more about our estate planning advice service.
This article is intended to be for information only and should not be taken as financial advice. Ask your Origen adviser or contact our Client Services Team 0344 209 3925 or at ClientServices@origenfs.co.uk to find out more about our estate planning advice service. Calls are charged at your phone company’s basic rate. All calls are recorded for business purposes.
CA11306 Exp:04/2025
