Data available from HMRC’s website suggests that a total of £6.1 billion in Inheritance Tax (IHT) was paid in the 2021/22 tax year. This represents close to a 13% increase on the previous year and the upward trend is on-track to continue. The increase is likely to be a result of the ongoing effects of the Covid pandemic, increases in asset values (particularly residential properties), inflationary pressures and the government’s decision to freeze the IHT Nil Rate Bands until at least 2025/26.
Figures produced by the Office for Budget Responsibility estimate that IHT receipts this year (2022/23) will top £6.7 billion. They also estimate that by 2026/27 this will have increased further to £8.3 billion. These do feel like staggering forecasts, particularly if you compare to IHT receipts of £4.8 billion from 2016/17.
So, what can you do to mitigate tax? One of the simplest things to do, as long as it doesn’t affect your standard of living, is to make gifts. Here are a few of the options available to you:
- Small gifts – You can give small gifts worth up to £250 to anyone you wish in each tax year.
- Annual exemption – Everyone has an annual gifting allowance of £3,000. This could cover some larger gifts which are more than £250 but less than £3,000. If the full £3,000 has not been used from the previous tax year, you can carry it forward to the next tax year so the maximum one person can gift free of IHT in any two-year period is £6,000.
- Gifts out of income – Gifts made out of your income may be exempt from IHT. Such gifts must be made from income as opposed to capital. There must be a regular pattern of gifting. It is wise to keep detailed records to demonstrate that the gifts are coming from your income. Such gifts must not change your normal standard of living.
- Gifts to charities and political parties – If you decide that you would prefer to make a donation to a charity or a political party then such gifts are generally free from IHT so long as the charity or political party is registered in the UK.
- Gifts between spouses or civil partners – Your spouse or civil partner may receive any gifts without any IHT implications. There are different rules for non-married partners.
- Gifts in anticipation of a wedding or civil partnerships – each parent of the bride, groom or partners can give £5,000 free from IHT. Grandparents or other relatives can give £2,500 and anyone else can give up to £1,000 free from IHT.
- Potentially Exempt Transfers (PETs) – If your gifts do not fall into any of the above categories, you can still give away as much capital as you like. So long as you live for at least 7 years after making such gift and you retain no benefit from them, then they should be free from IHT.
If you would like advice on the tax efficiency of your gifts then contact a member of our Private Client team.
Article published 20 July 2022.
