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    Category: Inheritance

    Is giving money away an IHT planning option?

    With Labour’s proposed changes to inheritance tax (IHT), many people are reviewing their estate planning strategies. While there are various approaches to managing IHT liability, one straightforward method often gets overlooked: giving money to loved ones during your lifetime.

    Though gifting may seem simple, understanding the tax implications is crucial for effective estate planning. Here’s a comprehensive guide to the key rules and exemptions:

    Annual Gift Allowance

    You can give away up to £3,000 in total each tax year without any IHT implications. If you don’t use this allowance one year, you can carry it forward to the next tax year only, potentially allowing you to give away up to £6,000 tax-free.

    Small Gifts Exemption

    You’re free to make gifts of up to £250 to as many different people as you wish each tax year. However, you cannot combine this with other exemptions for the same person in the same tax year.

    Wedding and Civil Partnership Gifts

    Special exemptions apply to wedding and civil partnership gifts, with different limits based on your relationship to the couple:

    • Parents can give up to £5,000
    • Grandparents and great-grandparents can give up to £2,500
    • Anyone else can give up to £1,000

    Regular Gifts from Income

    You can make regular gifts from your income without IHT implications, provided you maintain sufficient income to sustain your normal lifestyle. These gifts must be part of a regular pattern and come from your income rather than your savings or assets.

    The Seven-Year Rule

    Gifts that exceed these exemptions become what’s known as Potentially Exempt Transfers (PETs). If you survive for seven years after making such a gift, it becomes completely free from IHT. However, should you die within seven years, the gift may be subject to IHT, though taper relief can reduce the tax payable on gifts made between three and seven years before death.

    Gifts to Spouses and Civil Partners

    Gifts between UK-domiciled spouses or civil partners are typically exempt from IHT, regardless of value or timing. Different rules may apply if one partner is not UK-domiciled.

    Strategic Considerations

    When planning your gifting strategy, consider:

    • Keeping detailed records of all gifts made
    • Ensuring you retain sufficient assets for your own needs
    • The impact of inflation on your future financial security
    • Whether the recipient is ready to receive the gift
    • If you might need care in later life

    While gifting can be an effective way to reduce IHT liability, it’s important to balance tax efficiency with your own financial security. Professional advice can help ensure your gifting strategy aligns with your overall estate planning objectives while maintaining your current lifestyle needs.

    Remember that tax rules can change, and what works today might not be optimal tomorrow. Regular review of your gifting strategy with a qualified professional can help ensure it remains effective and appropriate for your circumstances.

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