Can I lower my IHT bill by gifting money to family?

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Ask the expert at Smith & Pinching about IHT-exempt gifts - Credit: Getty Images/iStockphoto

I have a considerable estate worth about £1.2 million. I’m not married and have no children, so there’s going to be an Inheritance Tax bill to pay when I die. I’d like to give money to my nieces and nephews each year at Christmas, because I can afford it and because it will help to lower the value of my estate. Can I do that or will the Tax Office penalise me for trying to avoid tax?

Phil Beck, Independent Financial Adviser with Smith & Pinching, Chartered Financial Planners

Phil Beck, Independent Financial Adviser with Smith & Pinching, Chartered Financial Planners - Credit: Smith & Pinching

Phil Beck of Smith & Pinching responds:

IHT is certainly a tax that can be mitigated, at least to a degree, with the right strategies. HM Revenue & Customs (HMRC) allows you to take measures to reduce a future potential Inheritance Tax (IHT) liability and provides a range of exemptions for you to use.

IHT-exempt gifts are one of the essential building blocks of an IHT mitigation strategy. You can give away up to £3,000 each year free of IHT liability. On top of this, you can give up to £250 each to any number of people each year, as long as the total you give them in the tax year doesn’t go over £250.

In addition to the annual allowances, you can make IHT-exempt wedding gifts as well as gifts to charities and political parties. If you have excess income, you can use that to make regular gifts that will be considered immediately outside your estate provided they are made regularly and are from excess income – so don’t lead to a reduction in your normal standard of living.

Gifts over and above your gift allowances will also be treated as outside your estate once seven years have elapsed since you made the gift – and potentially up to 14 years before your death if any chargeable lifetime transfers have been made.

The amount you can leave in your estate without incurring IHT – known as the Nil Rate Band –currently stands at £325,000 per person. There is a further exemption, known as the Residence Nil Rate Band, which only applies when a person leaves their home to their direct descendants. As you have no children, you are unable to benefit from this additional exemption.

IHT and the treatment of gifts is a complex area of planning. I strongly recommend you meet with an Independent Financial Adviser to explore how best to mitigate your future IHT liabilities. There may be other routes to explore – pension contributions or certain IHT-favourable investments, for example – which will depend on your personal and financial circumstances.

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Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

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