Gifting from income and other estate planning options

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Inheritance Tax revenues rising

The question marks hanging over inheritance tax (IHT) have now all but disappeared, however, the impact of this tax on individuals and families is growing. Government receipts for April 2021 to March 2022 were £6.1 billion, which is £700 million higher than in the same period a year earlier.

Simplifications to Inheritance Tax ruled out

When the then Chancellor, Philip Hammond, asked the Office of Tax Simplification (OTS) back in January 2018 to consider how to simplify IHT, two reports followed. The second, issued in July 2019, proposed a range of significant reforms to the tax. Almost immediately after its publication, the subject of IHT simplification disappeared into a Treasury black hole. Subsequent Budgets passed with no mention of the OTS’s efforts.   

Finally, on the last day of November 2021, well after the Autumn 2021 Budget, clarification emerged in a letter from the Treasury to the OTS which stated “…the Government has decided not to proceed with any [IHT] changes at the moment, but will bear your very valuable work in mind if the Government considers reform of IHT in the future”.

As a result, the long-awaited response has brought certainty around IHT, at least until the next election. However, by the time the Treasury had said “thanks, but no thanks” to the OTS, the current Chancellor had already frozen the IHT nil rate bands until at least April 2026. By then the main nil rate band will have been stuck at £325,000 for no less than 17 years.

As many people are now starting to learn from the freezing of the personal allowance (also to 2026), inflation turns a freeze into a tax increase. This has been referred to as “fiscal drag.”

Financial Planning to help mitigate IHT liabilities

There are, however, a number of strategies to help mitigate your liability with careful financial planning. The key is to start as early as possible.

In highlighting several features of the current IHT rules that it felt needed reform, ironically the OTS report supplied a list of planning opportunities worth considering. These included:

Normal expenditure gifts:

If you make gifts that are:

  • regular;
  • out of your income (including ISA income);
  • and do not reduce your standard of living

These are exempt from IHT, regardless of their size. In its second report, the OTS said it had heard “…from a few respondents that the exemption has on occasion been used to exempt gifts worth more than £1 million for individuals with a very high annual income”.

At more modest levels the exemption could mean, for example, that if your regular spending pattern has fallen because of the pandemic, you could use the savings to make gifts free of IHT. Similarly, any investment income usually automatically reinvested is a potential source of normal expenditure gifts.

Outright lifetime gifts:

Outright gifts suffer no immediate IHT liability and are free of IHT if you survive seven years after making them. If you do not reach the seven-year point, any IHT liability on the gift is reduced by 20% per year from the start of the fourth year, e.g., at five and a half years only 40% of the full IHT is payable on death.

Annual & Small Gifts Exemptions:

The annual exemption rate is set at £3,000 and married couples are able to utilise two allowances, giving them a total of £6,000 per year to use.

The £250 ‘small gifts’ exemption enables you to give £250 to any number of people of your choosing and will immediately be exempt from IHT. However, the drawbacks of this exemption mean you are unable to use it together with other exemptions and can’t be included in a larger gift.

Despite these amounts seeming small relative to someone with a significant estate, the annual exemption’s compound effect over a period of time can generate significant IHT savings.

Effective Inheritance Tax and Estate Planning

There are also other steps you that can be taken in addition to these mentioned above, however, with any financial and tax planning around this area it is advisable to seek advice as to what step(s) is most appropriate for you and your family. Please download our Guide to Inheritance Tax & Estate Planning here

At Armstrong Watson our quest is to help our clients achieve prosperity, a secure future and peace of mind. We provide bespoke tax planning, financial planning and wealth management all under one roof. Please note, advice on IHT related matters could be provided by a mixture of both our financial planning and tax specialists.


For more information or advice on how you can save on Inheritance Tax, get in touch with one of our financial planning team on 0808 144 5575 or email help@armstrongwatson.co.uk.

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