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Between April and August last year, HMRC collected £3.2 billion in Inheritance Tax (IHT), approximately £300 million more than the same period the previous year.

With asset levels continuing to rise, and the IHT tax-free thresholds frozen until 2027/28, many more individuals may need to consider the potential impact of IHT on their estates.

Inheritance Tax Thresholds

Individuals have a nil rate band of £325,000, and married couples can potentially benefit from a combined £650,000. Estates valued up to these amounts are not subject to IHT. Any excess is taxed at 40%. Additionally, the residence nil rate band provides an extra £175,000 per person (£350,000 for married couples), subject to certain criteria.

In total, estates could potentially have up to £500,000 per person (or £1 million for married couples) before any IHT is levied.

The Role of Gifts in Estate Planning

Gifts can play a crucial role in reducing the value of an estate for IHT purposes. A gift may consist of money, household or personal goods, stocks and shares, property, or land. Gifts between spouses or civil partners do not attract IHT, provided they are permanent UK residents. Similarly, gifts to charities or political parties are exempt from IHT.

While many are familiar with the 7-year rule for larger gifts to reduce asset value, there are several ways to make smaller gifts without incurring IHT or the 7-year rule:

Annual Exemption: You can gift up to £3,000 annually without it being subject to IHT. This can be a single gift or multiple gifts, as long as the total does not exceed £3,000. If unused in the previous tax year, this allowance can be carried forward.

Small Gifts: You can make unlimited gifts of up to £250 per person each tax year, provided you have not used another allowance on the same person.

Weddings/Civil Partnerships: You can gift specific sums for weddings or civil partnerships: £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else. These can be combined with other allowances except the small gift allowance.

Gifts from Income: You can make regular payments from your income, provided you can afford them after covering living costs and they come from your regular income. This allowance can be combined with others except the small gift allowance.

Well-planned and timed gifts can, not only be appreciated by recipients, but also help reduce the value of your estate over time and potentially lower your IHT liability.

To discuss your estate planning and reducing your personal tax implications, please contact a member of the CB Reid team.