Labour has launched a multi-pronged raid on the nation’s wealth, by slapping inheritance tax on pensions and freezing the £325,000 IHT nil-rate band and £175,000 main residence band all the way to 2030.
She froze IHT gifting allowances to 2030, too, further eroding their value. But to my astonishment Reeves did leave one IHT loophole wide open.
This makes it even more important to max out your gift allowances. With careful planning, you can still knock tens of thousands of pounds off your family’ IHT bill. It is literally in your gift.
Under something called the seven-year rule, every gift you make will fall out of your estate and become free of IHT provided you live for seven years after making them.
These gifts are known as potentially exempt transfers and must be made either to an individual or paid into a trust.
You can gift cash and shares, household and personal goods such as furniture, jewellery or antiques, or even a house, land or buildings.
Even if you do die within seven years, a PET may still be worth making. After three years, the punitive 40% IHT charge steadily reduces on a sliding scale thanks to taper relief.
Gifts made between three and four years of death are taxed at a reduced rate of 32%, for example. This falls to 24% the following year, 16% the year after and just 8% in year six.
Thereafter, there’s no IHT.
There’s no point making gifts to a spouse or civil partner, because these transfers aren’t subject to IHT in the first place. You need to make gifts to others.
Make a record of all the gifts you make and tell your executors where to find it. Set out what you gave, who you gave it to, the value of the gift and when you made it.
Anything you leave in your will does not count as a gift but will form part of your estate, which is the total value of all the money, property and possessions left when you die.
It may then become subject to IHT if you exceed your nil-rate band.
You can also make gifts to anyone you choose with immediate IHT exemption, but again, you need to know the rules.
Under the “annual exemption”, every adult can gift a maximum £3,000 a year IHT-free.
Couples can gift £6,000 between them. If they didn’t use last year’s £3,000 gift allowance, they can mop that up to give £12,000 in total.
By doing that they would instantly knock £4,800 off a potential IHT bill.
And they get a new annual exemption from the start of the new tax year on April 6, 2025.
Every adult can also make unlimited IHT-free gifts of up to £250 to as many people as they like each tax year, provided the recipient has not benefited from the £3,000 allowance.
Parents can also gift £5,000 to a child on marriage, £2,500 to a grandchild or great-grandchild who is getting married, or £1,000 to a relative or friend.
Don’t overdo the generosity, though.
Make sure you don’t gift money that you may need later in life, say, for long-term care. To qualify as a gift under HMRC rules, that money doesn’t belong to you anymore. So you can’t really ask for it back.
Now for that loophole I mentioned.
It is theoretically possible to gift unlimited sums with immediate IHT exemption, under the something called the “normal expenditure out of income exemption” rule. This is also known as “making gifts from surplus income”.
You can pass on as much as you wish, provided you can show you have enough income left to fund your usual standard of living.
The gifts should be made regularly so they form part of your regular expenditure.
Again, you need to keep detailed records, along with a simple letter stating the gift is from surplus income.
You could use the money to fund pension or Isa contributions for adults or children, cover school fees, pay a child or grandchild’s rent, or even send the family on a regular annual holiday.
Payments must come from your current income, which may include earnings, dividends, interest, rental or pension income.
It can’t come from savings or investments, which are deemed as capital, or one-off sources of cash such as a workplace bonus or property sale.
HMRC will want to see a pattern of payments over several year, although they don’t need to be the same amount on the same date.
This is such a brilliant option for saving IHT that I can’t believe Reeves ignored it in the Budget. Don’t make the same mistake yourself.
Gifting is a brilliant opportunity to pass on an inheritance while the beneficiaries are still young. But don’t give money you may need yourself one day.