How to reduce inheritance tax on financial gifts

How to reduce inheritance tax on financial gifts

Jan 1, 2024

Financial gifts can make a huge difference for children and grandchildren but make sure they are tax-efficient, warns Investec Wealth & Investment

The best ways to give financially this Christmas include gifting from surplus income, Junior ISAs and bare trusts. In addition, there are annual exemptions, small gift exemptions and charitable giving.

Currently no tax is due on the first £325,000 of any estate but that rises to £500,000 if a property is being left to children or grandchildren for estates under £2m. Married couples and civil partners can leave up to £1m tax-free.

Faye Church, chartered financial planner at Investec Wealth & Investment (UK), said: ‘Gifting to children or grandchildren could be a tax-efficient way to help to improve their financial security, help them pay university tuition fees, pay off student loans or even get them on the property ladder.

‘You can gift money from spare cash, invest in a Junior ISA or a trust for younger relatives if you are scratching your head wondering what to get your loved ones for Christmas this year.

‘Gifting needs to be carefully planned, calculating how much is affordable to gift and structuring investment portfolios in the most inheritance tax efficient way.’

Here are some handy tips to plan your gifting, taking into account tax liability.

To qualify for gifting from surplus income, money has to come from income rather than capital, form part of a regular pattern and not affect everyday standards of living.

It is very useful for people with significant pension income as well as those with rental and investment income.

Lump sum payments from insurance policies or the capital element of life annuities do not qualify.

It is important to record the first gift and make clear that it is part of a series of gifts as that ensures it is immediately outside the estate.

Junior ISAs need to be set up by parents or legal guardians but once they are set up anyone can contribute. Contributions in any tax year should not exceed £9,000. There are no investment limits for bare trusts and the money can be used by grandchildren at any time for any purpose. Money is taxed as if it is held by a child and regular contributions by grandparents from surplus income are exempt from IHT.

The annual exemption allows £3,000 to be given away a year without being added to the value of an estate and can be carried forward for a year meaning individuals can give £6,000 and couples £12,000 if they have not used the exemption previously.

The small gift exemption is £250 with no limit on the number of people it can be given to and £2,5000 can be given for a marriage or civil partnership. Leaving 10% of your net estate to charity will reduce the IHT rate to 36% from 40% under charitable giving rules.

The latest inheritance tax (IHT) figures for April to August this year showed £3.2bn was collected with a record £795m paid in June this year.

IHT receipts are expected to keep climbing and are forecast to reach £8.4bn by the 2027/28 tax year due to a combination of rising wealth and a freeze in IHT thresholds at their 2020/21 levels until 2027/28.