Reduce inheritance tax: How to cut IHT down by 100 percent according to an accountant

Gifting while you are still alive is a great way to reduce IHT. However, not all gifts you make will be free; your gifts will be classed as a potentially exempt transfer or a chargeable lifetime transfer for IHT purposes.

Potentially exempt transfer (PET)

This is a gift or transfer of unlimited value, which has the potential to be exempt if you survive seven years from the date of the gift.

If you don’t survive the gift by seven years, the PET becomes potentially chargeable and is added to the value of your estate for IHT.

If the combined value is more than the IHT threshold, IHT may be due.

This means the remainder of the gift that falls outside the nil rate band will only be subject to inheritance tax.

However, it may benefit from a reduction in tax depending on the number of years the individual survived since the gift.

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For example: Shaun gifts a property (mortgage-free) to his son Charlie.

The value of the home is £425,000. As it is not his main residence it will not benefit from residency relief.

The property is £100,000 above the nil rate band (£325,000) and therefore Shaun must survive seven years to ensure this gift is not subject to IHT.

However, Shaun died five years after gifting the property to Charlie.

Therefore, the gift was called back into his estate for IHT purposes.

Due to the potentially exempt transfer he did not incur the full tax charge of £40,000 (40 percent of £100,000). Instead, Charlie paid £24,000 (60 percent off the full IHT rate taxable) on the gift.

* The following figures, including gifts, potential exemptions on transfers, tax-efficient status, tax and qualifying criteria, are subject to future changes. The figures provided are for general guidance, and you should seek financial advice for personal recommendations. Some gifts may require a survival term beyond seven years and therefore you should seek professional advice where needed.

Making use of free gifts

We all love a freebie! And there are plenty of free gifts you can make to help reduce your estate value, if needed, and ultimately reduce or avoid inheritance tax.

Copy extracted from THE MONEY EDIT: Your No Shame, No Blame Guide to Taking Control of your Money by Makala Green, published by Yellow Kite £16,99