Britons can reduce inheritance tax bill with gifts

Inheritance tax is a hefty 40 percent tax on any total assets a person inherits above the value of £325,000 when inheriting a sum from a single person, or above £650,000 for a couple.

More people are being hit by the tax as house prices and the value of other assets increases.

Giving gifts is one way people can reduce the size of their estate and so decrease their inheritance tax liability.

Tom Parry, chartered financial planner at Old Mill, said: “Giving assets or funds away during your lifetime can be an effective way to reduce Inheritance Tax (IHT).

“Not only does gifting help mitigate any potential tax liability, but it also means you can pass on wealth to loved ones now, when they may need it most and you can see them benefit.

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“However, before you do, it is crucial that you understand the potential pitfalls of gifting, such as ensuring you retain enough for your own financial security and being aware of the nuances of the IHT rules.”

He went on to explain how Britons can give away up to £3,000 each tax year, divided among any number of people.

This allowance can be taken forward for one year meaning a couple can potentially give away £12,000 across a tax year.

There is also the option to give away any number of gifts up to £250 to different people across a financial year.

Mr Parry said: “Gifts above this amount [the £3,000 allowance], and assuming no other exemptions apply, are subject to the seven-year rule, which – as the name suggests – means the value of the gift will be included in your estate for IHT purposes for seven years. After that, the gift will not be liable for tax.

“Seeking professional advice is essential to navigate these complexities and create a comprehensive gifting strategy that optimises tax benefits while preserving your financial well-being.”

With the seven-year rule, a person has to survive for another seven years before the gift becomes tax-free.

However, as the years progress towards the seven-year anniversary of when the gift was given, the amount of inheritance tax that applies to the gift gradually decreases.

Research from SunLife found 25 percent of people aged over 50 have given significant cash gifts to their family in the past five years.

Of these gift givers, 19 percent chose to gift an early inheritance to see their loved ones enjoy the money, passing on £20,778 on average.

Katie Phelan, 33, from North Somerset, and her husband were able to buy their first two properties with help from her parents.

The couple purchased a three-bedroom semi-detached house in July £192,500 with a £10,000 gift from her parents.

They then bought a three-bedroom terraced house for £304,500 in April this year with a deposit of £135,000, including £18,000 from her parents.

Katie said: “I am so thankful that my parents have been able to help me for a second time.

“Their additional money has meant I could purchase a three bed instead of a two bed and means I have that dedicated office space for working from home. I will be eternally thankful to them and am so grateful they have been so kind.”

People can also give away tax-free gifts to a person who is getting married or entering a civil partnership, including up to £5,000 to a child, £2,500 to a grandchild or great grandchild, or up to £1,000 to anyone else.