Low risk ways to minimise inheritance tax before possible gifting clampdown in the Budget

Speculation is mounting that Chancellor Rachel Reeves could increase Inheritance Tax (IHT) by raising taxes on “gifting”. Below, leading private wealth and family law firm TWM Solicitors highlights six things about gifting to consider before the Budget on 26 November.

When done properly, gifting can allow you or your clients to make payments to family or friends without those payments being subject to IHT. As the Chancellor is reducing the value of IHT exemptions under Agricultural Property Relief and Business Property Relief, gifting has become increasingly important as a way of reducing IHT.

1. Take advice, plan and execute carefully

To make the most of gifting, TWM says people need to understand the rules, take expert legal advice and plan carefully. This will help them to avoid falling foul of HM Revenue & Customs (HMRC) and IHT rules.

People should also keep detailed records, as this will greatly help the executor of a Will. Executors often have to pore over years of bank statements to prove to HMRC that the gifting was done properly, so a failure to keep adequate records could lead to a lot of additional administration and detective work, causing delays. Good record keeping saves time, money and tax.

2. Do not give away too much…

People need to think carefully about how much money they will need towards the end of their lives. If you have too much, it will be subject to IHT. On the other hand, giving away too much comes with risks. For example, if you need significant social care in the future and are unable to fund it from what you retain, your local authority might determine that you intentionally gave away your assets to avoid paying care fees. If so, it will treat you as if you still had said assets. This would place the burden on those who received the gifts or your heirs and, if they do not pay up, it could leave you needing care with nobody able and willing to pay for it.

3. …But don’t “under gift” either

TWM says that it often finds that the people who are likely to get caught by IHT, out of caution, keep too much money in their estate. By retaining more money than they need, they will leave heirs with a bigger IHT bill than necessary. People often overestimate how much they will have to pay for a care home and their likely longevity. People also often forget that the cost of a care home need not be funded entirely out of capital – if you have a healthy income, this can go a long way towards meeting care fees. That being the case, TWM says individuals should consider gifting money to their loved ones earlier in life.

There are several different tax-free gift allowances that people are failing to make maximum use of. These include the £3,000 annual exemption, which, if you do not use it in a given year, can be rolled over once to the following year to make £6,000. Others include making wedding gifts of £5,000 per child, £2,000 per grandchild and £1,000 for anyone else. You are also allowed to make an unlimited number of small gifts of up to £250 per person annually, provided you have not used one of your other gift allowances for that person.

4. Use surplus income wisely

IHT will be applied to gifts given from your savings or other assets, unless you live for seven years after giving them, or your total chargeable estate is under the IHT threshold. If the money you are gifting is from income you do not need, there is no limit if it is done correctly. However, this exemption is subject to various rules and procedures, and advice should be taken before proceeding. You may need to prove that the money was surplus to your requirements.

5. Be careful under a Power of Attorney

If you are acting under a Power of Attorney   on behalf of someone else, your ability to give gifts on their behalf is extremely limited. Beyond that, you must obtain permission from the Court of Protection if you wish to make further gifts. Failing to do so puts you at risk of the court making you take back the gift or your Power of Attorney being revoked. HMRC may judge your gifts to be invalid and chargeable to IHT.

6. Do not make hasty decisions

Making a snap decision and rushing to cut IHT by gifting can backfire as many things can go wrong. On the other hand, if you were already planning on gifting, it will not hurt to proceed.