Inheritance tax explained: Britons can gift without paying tax

Inheritance tax (IHT) is a tax on the estate of someone who has died, including their property, possessions and money. It is usually charged at 40 percent on anything above the standard nil-rate band – £325,000 per individual.

A report, conducted by Tower Street Finance, found around 80 percent of the population are intending to leave an average inheritance of £290,000 to family members and loved ones.

But 54 percent of UK adults still do not have a will and many have a limited understanding of inheritance and intestacy rules.

IHT receipts generated a record £6.4billion for HMRC in the 2022/23 tax year meaning many more famileis are falling into the net.

It is now more important than ever to understand how people can gift to cut their IHT bill.

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Some gifts are exempt from inheritance tax especially those made more than seven years before the person died. However, not all gifts are exempt.

On the Government website, it explains that most gifts a person makes during their lifetime — except gifts covered by an exemption — are called potentially exempt transfers.

This is because a gift is exempt from IHT if the person survives for seven years after giving it.

A gift can be money, property or possessions – anything that has value.

Saving on inheritance tax

Mike Barrow, financial coach at Claro Money explained that any gifts between married couples are free from IHT, without limit.

People often choose to leave their entire estate to their spouse to remove any liability from IHT. In this case, their full nil rate band allowance (NRB) and residence nil rate band (RNRB) would also pass to their spouse for them to use upon death.

Any unused allowance can be transferred between spouses and civil partners meaning that the maximum potential threshold of the last remaining partner in a married couple is currently £650,000 for NRB and £350,000 for RNRB (so a potential total allowance of up to £1 million).

He continued: “Gifts are a popular method to reduce IHT liability. Popular gift exemptions include annual gift exemption (£3,000 per year), gifts upon marriage (between £1,000 – £5,000 depending on who the recipient is) gifts between spouses, gifts to charity and ‘normal expenditure out of income’ (which has a few specific qualifying rules).

“Trusts are also a popular method to reduce IHT while either retaining or gifting assets in excess of the above exemptions. Popular trusts include the Discounted Gift Trust and the Gift and Loan Trust among others.”

Trusts, however, can be complicated and so Britons are urged to seek advice rather than navigating them alone.