Since the start of the tax year in April, an average of £720m a month has been collected in IHT. This means receipts could pass £8.5bn by the end of the financial year. That's up from £6.1bn in 2021-22.
IHT is currently only payable on a small proportion of estates, but with thresholds frozen until 2030, more people are likely to face a bill in the future.
Here, we explain how IHT works and outline six ways you can avoid the tax when gifting money.
Who needs to pay IHT?
IHT is a tax payable on the estate of someone who has died. The value of an estate includes all of the deceased's property and possessions, and any money saved or invested.
Anything over £325,000 in your estate after death is subject to IHT, charged at 40%. The £325,000 allowance – called the 'nil-rate band' – rises to £500,000 for direct descendants such as children. Couples who are married or in a civil partnership get a combined allowance of £1m.
Currently, relatively few estates are subject to IHT. The latest HMRC data for 2021-22 shows that just 4% of UK deaths resulted in an IHT charge.
However, IHT thresholds haven't changed for more than a decade, and will remain frozen until 2030. This, coupled with rising property prices, means a growing number of people who were previously unaffected by IHT may soon find their estates exceed their tax-free allowances.
Find out more:6 ways to give money without paying IHT
If your estate is likely to come under the scope of IHT, gifting money during your lifetime is a simple step you can take to reduce the potential tax burden.
However, the rules can be complicated and there are various exemptions to watch out for. Here are six ways to successfully give cash, tax-free:
1. Use your annual gift allowance
You can give £3,000 away tax-free during each tax year – either as a lump sum or split between several people.
You can also carry any unused annual exemption forward to the next tax year, but you can only do this for one tax year.
There is also a small gift allowance of £250. You can give any number of people this amount of money tax-free, provided they haven't benefited from your annual exemption in that tax year.
2. Avoid tax on larger gifts with the 'seven year rule'
Larger gifts which would normally trigger an IHT charge are dropped from the value of your estate as long as you live for at least seven years after giving the money. These gifts are called 'potentially exempt transfers' (PETs for short).
However, if you die within seven years, the gift will be considered part of your estate for IHT purposes. Tax on these gifts is calculated on a sliding scale based on how long you live after making each gift.
In practice, most gifts don’t become taxable, because the £325,000 nil-rate band is allocated to gifts made within seven years of your death before it’s used against the rest of your estate.
If you give something away but still benefit from it, it will still count towards the value of your estate. For example, this might be the case if you give your home to your child but continue to live in it rent-free until your death.
Find out more:3. Give a wedding or civil partnership gift
You can avoid IHT on gifts up to £5,000 for your child's wedding or civil partnership, up to £2,500 for a grandchild or great-grandchild, and up to £1,000 for anyone else.
This is in addition to the standard annual allowance, but not the small gift allowance.
4. Donate to your favourite cause
You don’t have to pay IHT on money given to UK charities, political parties, the National Trust, registered housing associations, national museums and universities.
What's more, if you leave more than 10% of your taxable estate to one of these groups in your will, the IHT rate for the rest of your estate will fall from 40% to 36%.
5. Gift out of surplus income
This means you can give money from your salary or pension, but it must be paid on a regular basis and become part of your 'normal expenditure'.
You don't need to commit to gifting recurring large sums, but one-off amounts are unlikely to qualify for relief. A good rule of thumb is the gift will likely qualify if it is made from your current account.
Making gifts out of surplus income should also not impact your current standard of living.
6. Help and support for family
If any relatives are currently dependent on you for maintenance because of old age or infirmity, these payments are also tax-free.
This would also include payments to an ex-husband, ex-wife or ex-civil partner.
Gifts for the maintenance, education or training of your children aged 18 or under (including step and adopted children) are also exempt from IHT.
undefinedsource https://www.which.co.uk/news/article/6-ways-to-avoid-inheritance-tax-on-gifts-an94I2U6hZCX