The following article is an excerpt taken from the report Inheritance Tax: Key Strategies And Insights Explained. Save 40% Today.
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Mark McLaughlin points out that significant inheritance tax savings are attainable simply by making lifetime gifts within certain limits.
The KISS principle (keep it simple, stupid) is generally helpful (albeit rather disparaging!) when it comes to inheritance tax (IHT) planning. This is because IHT planning is more complicated than it needs to be in many cases.
For example, significant IHT savings are possible simply by making regular use of available reliefs and exemptions, such as the annual exemption, the IHT nil-rate band, and potentially exempt transfers (PETs).
1. Annual exemption
Transfers of value (e.g., gifts) are generally exempt from IHT, up to a maximum of £3,000 per tax year.
Any unused annual exemption can be carried forward to the following tax year (but not beyond).
2. Nil-rate band
Every individual is entitled to an IHT threshold (or ‘nil-rate band’).
Where chargeable lifetime gifts (and the individual’s death estate) do not exceed the available nil-rate band (£325,000 for 2025/26), there is no IHT liability.
3. PETs
Most types of lifetime gifts (e.g., from one individual to another) are PETs. A PET made more than seven years before death becomes an exempt transfer for IHT purposes. Conversely, a PET becomes a chargeable transfer if made within seven years of death.
Chargeable transfers within the seven-year period ending with the latest chargeable transfer are cumulated, for the purpose of determining the IHT position (although if the individual made a PET just within seven years before death which therefore becomes chargeable, it may be necessary to take into account chargeable transfers within the seven years before that, making up to 14 years in total).
‘Doubling up’ the savings
The IHT savings may be doubled if married couples (or civil partners) make use of these elements, and substantial combined IHT savings can be achieved over a relatively short period of time.
Example: £1,354,000 given away – IHT-free
Husband and wife make the following cash gifts to their adult children:
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Husband - £677,000
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Year 1 – Gifted £325,000 nil-rate band plus £3,000 annual exemption for current tax year and previous year brought forward – Total £331,000
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Year 2-7 – Gifted annual exemption £3,000 x 6 years – Total £18,000
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Year 8 – Gifted nil-rate band £325,000 plus annual exemption £3,000 – Total £328,000
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Wife (As above) - £677,000
Thus, in a little over seven years, husband and wife will have managed to reduce their estates by a total of £1,354,000, resulting in a potential IHT saving of £541,600 (i.e., £1,354,000 x 40%).
This planning strategy might seem obvious, and rather ‘vanilla’ compared to some IHT saving techniques; yet in practice, it is often overlooked.
Is it affordable?
It must be borne in mind that if gifts are made, the donor will lose the income (if any) generated by the gifted assets, as well as the underlying assets.
If the asset is gifted but income generated by the asset is retained, the ‘gifts with reservation’ anti-avoidance rules will need to be considered. If ‘caught’ by those rules, the IHT savings may be wholly or partly lost.
Practical tip
Other IHT reliefs (e.g., business property relief) and exemptions (e.g., normal expenditure out of income) could also be considered, if appropriate. Where assets are being given away instead of cash, other taxes (e.g., capital gains tax) may need to be addressed. Above all, IHT (and other tax) mitigation should never take precedence over personal circumstances and financial needs.
