In 2021/22, HMRC collected a record £6.1bn in Inheritance Tax (IHT), a jump of 14 per cent on the previous year, which saw an increase in taxable estates of 17 per cent. With a general election looming, I believe there has never been a more pertinent time to consider lifetime gifting to reduce the value of your estate.

IHT Exemptions

The UK’s IHT system can be daunting, with many estates now facing a 40 per cent tax charge on death. However, lifetime gifting, if affordable, provides a legitimate means to reduce this burden.

Transfers between spouses, both in lifetime and on death, are usually completely exempt from IHT, which can allow spouses to restructure their assets to ensure that they are held in the most tax-efficient way.

Individuals can gift up to £3,000 annually without incurring any IHT, and any unused allowance can be carried forward for one year.

Smaller gifts up to £250 to anyone who has not already benefitted from the annual exemption are also IHT-exempt, as are wedding gifts (£5,000 to your child, £2,500 to your grandchild or great-grandchild, and £1,000 to any other person) if they are made before the wedding.

For individuals with surplus income, gifts made out of surplus income may be exempt if the criteria to qualify as “normal expenditure out of income” is met.

Potentially Exempt Transfers

A gift to an individual that is not covered by an allowance or exemption is classed as a ‘potentially exempt transfer’ (PET), and under current rules will be free from IHT provided you survive the date of the gift by seven years. Should you die within that period, the PET will fail and form part of your estate on death.

Trusts

For those whose affairs are slightly more complex, a suitable Trust structure can be a powerful tool for IHT planning. Transferring assets into Trust can remove assets from your estate, potentially reducing IHT exposure and protecting wealth for future generations. While setting up a Trust involves careful consideration and professional advice, it can serve as a long-term structure to safeguard family wealth.

Capital Gains Tax

Gifting could trigger Capital Gains Tax (CGT) implications. However, there are ways to mitigate these effects. Strategic planning and professional guidance are essential to ensure that the benefits of gifting are maximised while minimising tax liabilities.

Professional Advice

Navigating the intricacies of IHT and CGT demands a comprehensive understanding of tax laws and regulations. Seeking professional advice is crucial to crafting a personalised gifting strategy that aligns with individual financial goals.

As we step into the New Year, let it be a year of informed financial decisions. Gifting remains a potent strategy for mitigating IHT liabilities, with added benefits for both the giver and the recipients. By understanding the various exemptions, exploring Trusts, and considering the implications of CGT, individuals can take proactive steps towards securing their financial legacies.

Remember, the key to success lies in informed decision-making and the guidance of experienced advisers.

With a general election on the horizon and the potential for a change of government, who knows what the future holds for the IHT regime and tax-free lifetime gifting? Now may be the time to ‘use it before you lose it’.

Alec Stewart is a Partner, Murray Beith

Use it before you lose it to beat inheritance tax -