Gifting can be a very useful tool in Inheritance Tax Planning, and if used correctly, it can partially or wholly mitigate the impact of Inheritance Tax on your estate. However, gifting is not always so simple and there are pitfalls for the unwary.
The First Myth: Once gifted, the money or asset is out of my estate.
Sadly, this is incorrect. Although a gift, once made, is treated as immediate for certain purposes, such as Capital Gains Tax, the same is not true so far as Inheritance Tax is concerned. A gift will only fall out of your estate completely after the expiration of 7 calendar years from the date of the gift. For example, if you made a gift on 15 September 2025 the value of the gift will only falls out of your estate at midnight on the evening of 14 September 2032. (There have been rumours circulating that this period might be increased or there will be a lifetime gifting amount but until the forthcoming budget, none of these rumours can be confirmed).
The Second Myth: Tapering Relief will apply at the beginning of the 4th year.
During my years of practice, this is one of the biggest misconceptions I hear from clients. Everyone can gift up to a maximum amount of £325,000 (the inheritance tax nil rate band) over a period of seven years. Gifts are added together, and each gift starts its own 7-year clock. Tapering relief will only apply to gift that took the total of the gifts over and above the sum of £325,000.
For example, if you were to gift £150,000 this year the gift will fall out of your estate in 2032. In the meantime, if anything untoward was to happen within seven years, the value of the gift is brought back into the value of your estate, and it will reduce the amount of the nil rate band applicable to your estate upon death by the sum of £150,000. i.e. although your estate still benefits from the sum £325,000 exemption, £150,000 of that sum has been used.
If in 2026, you make a further gift of £200,000, (which will fall out of your estate in 2033), the total value of the gifts would be added together, making the total value of the gifts £350,000. Tapering relief will only apply to the sum of £25,000, being the amount of the gift over the sum of £325,000. If you were to pass away before the beginning of fourth year of the gift made in 2026, no tapering applies, and your nil rate band would have been used up.
The Third Myth: “I can only gift a maximum of £3000 per annum without the 7-year rule applying”
Whilst this is true so far as any capital gift is concerned, this is not true so far as gifts out of excess income is concerned. This little known, and sadly, from a tax-payers point of view, little used exemption, can be a valuable tool in gifting monies to future generations. The only limitation to gifting out of excess income is that it must really be “excess income” i.e. it will not impact on your lifestyle.
For example, if parents or indeed grandparents have joint income of say £100,000 per annum, but when they analyse their expenditure are only spending £75,000 per annum, in theory they can give away the additional £25,000 per annum completely free of tax and such a gift will not come under the seven-year rule.
In modern times, as people are living longer if a couple in their 60’s were to use this exemption and live into their 80’s, based on the figures above, they could have given away £500,000 tax free to their children.
However, if you want to make us of this exemption, you must keep very careful records of your income and outgoings as the details will have to be reported to the HMRC in due course. Luckily with the use of modern technology, this is not an overbearing task.
Even if you only gift an amount up to the annual exemption figure of £3,000, it is prudent to keep a note of such gifts. For the sake of clarity, the figure of £3,000 is the maximum total an individual can gift (subject to minor exemptions which are outside the scope of this article), before the 7-year clock starts to tick.
The Fourth Myth: “My Friend Knows Best”.
I once heard a story of a solicitor who, when he suggested to a client using gifts out of excess income (as she had a lot of excess income) he received a telephone call the next day from the client complaining that “he had told her to do something illegal”. Obviously, he was very taken back by this and asked the client who told her it was illegal.
Her reply stunned the lawyer even more when she said she was in the pub last night and her friend “who knows about these things” told her you can’t do that. The solicitor politely asked if her friend was an accountant or a lawyer and she said no but she “knows things”. The solicitor’s reply: “So you would rather take advice from someone with no legal or tax training, who had never worked in a professional firm over himself, who had been to university, law school, sat professional exams or been in practice for 15 years?”. Happily the client listened to the solicitor and two decades, later when she passed, away her children were very grateful to him for the advice.
Solution – Take the Correct Advice!
As Joseph Addison (1672-1719), poet, essayist, playwright and politician wrote “There is nothing which we receive with so much reluctance as advice”
As the above story indicates taking the wrong advice, or rather, not listening to the correct advice, can be costly.
So don’t be reluctant to take advice! For more information about the use of gifting in Inheritance Tax planning, please contact a member of our Child and Child’s Private Wealth Department, Rhea Rughani (TEP), Colin Glass or Vincenzo Mazzone.
The information contained in this article is general guidance only. The application and impact of laws can vary widely depending on the specific facts involved. The information in this article is provided with the understanding that the authors and presenters are not giving legal, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional legal, tax or other competent advisers. Before making any decision or taking any action, you should consult a Child & Child professional.