Proactive Planning: Gifting and Spending Strategies for IHT Mitigation

As Inheritance Tax (IHT) becomes an increasingly significant consideration, especially with the upcoming changes to pension IHT, it's more important than ever to understand strategies to mitigate its impact. Smart gifting and spending during your lifetime can significantly reduce your estate's potential IHT liability.

Here are several key IHT mitigation strategies focusing on gifting and spending:

Gifting Strategies:

• Annual Exemption:

    ◦ You can give away up to £3,000 each tax year.

    ◦ This gift is immediately exempt from IHT and falls outside your estate.

    ◦ If you don't use the full £3,000 allowance in one year, you can carry it forward for one tax year.

    ◦ Key Consideration: It must be a genuine gift, not a loan.

• Small Gifts Exemption:

    ◦ You can make unlimited gifts of up to £250 per person per tax year.

    ◦ These are also immediately exempt from IHT.

    ◦ Key Consideration: You cannot combine this exemption with another exemption (like the annual exemption) for the same person in the same tax year.

• Gifts from Surplus Income:

    ◦ This allows for regular gifts made from your income (not capital) that do not affect your normal standard of living.

    ◦ These gifts are immediately exempt from IHT, provided the conditions are met.

    ◦ Key Consideration: This strategy requires meticulous record-keeping to prove that the gifts were genuinely from surplus income.

• Wedding/Civil Partnership Gifts:

    ◦ Specific amounts can be gifted in contemplation of, or at the time of, a wedding or civil partnership:

        ▪ £5,000 for a child.

        ▪ £2,500 for a grandchild or great-grandchild.

        ▪ £1,000 for anyone else.

    ◦ These gifts are immediately exempt from IHT.

    ◦ Key Consideration: The gift must be made on or before the marriage/civil partnership.

• Potentially Exempt Transfers (PETs):

    ◦ You can make unlimited gifts to individuals.

    ◦ These gifts become fully exempt from IHT if the donor survives for 7 years after making the gift.

    ◦ Taper relief applies between 3-7 years: If the donor dies within this period, the amount of IHT payable on the gift is reduced on a sliding scale.

    ◦ Key Consideration: The full value of the gift is "clawed back" into your estate for IHT purposes if you die within 7 years (though taper relief may apply). Gift with reservation rules also apply if the donor retains a benefit from the gifted asset.

• Gifts to Charities & Political Parties:

    ◦ Donations to UK-registered charities or qualifying political parties are fully exempt from IHT.

    ◦ An additional benefit: leaving 10% or more of your net estate to charity can reduce the IHT rate on the rest of your estate to 36% (down from 40%).

Spending Strategy:

• Spend More:

    ◦ Quite simply, spending your wealth to genuinely reduce the size of your estate directly lowers your potential IHT liability.

    ◦ Key Consideration: The spending must be genuine and not just moving assets around or retaining a benefit from them.

By thoughtfully utilising these gifting and spending strategies, you can proactively manage your estate and potentially reduce the IHT burden on your loved ones. Always ensure your gifts are genuine and that proper records are kept where necessary.

The Financial Conduct Authority does not regulate estate planning or tax advice.