4 key points to understand before using gifting in your planning

Preparing for the smooth transfer of wealth across generations is a key financial planning aim for many people.

However, without careful planning, this goal is under threat. Data from Statista shows that Inheritance Tax (IHT) receipts have increased every year since 2010, except for two years during the pandemic.

So, with IHT revenue rising, you may be looking for ways to pass on your wealth efficiently, and one of the most effective strategies is giving gifts while you’re still alive.

But before you start signing away assets to your loved ones, it’s important to be aware of how to structure your gifting to ensure your strategy is as efficient as possible.

Read on to discover four key points to understand before using gifting in your planning.

1. Gifting allowances enable you to pass on a certain amount free from Inheritance Tax

There is a range of allowances that let you pass on wealth without it counting towards your estate for IHT purposes.

These include:

The annual gifting exemption – this allows you to give away up to £3,000 each tax year free from IHT. You can also carry forward unused allowances for one year, meaning you can gift up to £6,000, and you can combine your allowance with your spouse or civil partner.
Wedding or civil partnership gifts – If someone you know is getting married or forming a civil partnership, you can give gifts ranging from £1,000 to £5,000, depending on your relationship to the recipient.
Small gifts – You can give multiple small gifts of up to £250 per person per tax year, provided they haven’t benefited from another exemption.
Gifts from surplus income – You can give gifts from your surplus income, provided the gifts are made regularly and don’t affect your standard of living.

Any gifts made beyond these allowances are usually treated as Potentially Exempt Transfers (PETs). PETs are not liable for IHT at the time they’re made, but they may be brought back into your estate if you pass away within seven years.

If you survive for seven years after making the gift, it typically falls outside of your estate. If you die within that period, the gift may still be taxed, but taper relief can reduce the amount of IHT due. The longer you survive, the lower the rate of tax applied to that gift.

Understanding how these allowances and rules fit together can help you pass on wealth gradually and tax-efficiently, rather than relying solely on your estate to do the work later on.

2. Deciding who makes the gift and when can improve its efficiency

Who gives a gift and when can make a considerable difference in the efficiency of the transfer.

For couples, it’s often worth thinking about which partner is best placed to make the gift. For example, if one person has a higher income, they may be better positioned to make regular gifts that qualify as gifts from surplus income.

Similarly, if one partner is older or in poorer health, it may make more sense for the other to make larger gifts, given the importance of surviving the seven years for PETs.

Timing is also key. Because of the seven-year rule, gifting earlier rather than later can increase the chances of the gift falling outside your estate entirely. Moreover, making full use of your allowances each tax year rather than giving larger amounts less frequently can help you pass on more over time without triggering IHT.

There can also be Capital Gains Tax (CGT) considerations when gifting certain assets, such as investments or property. So, spreading gifts across multiple tax years can help you make use of your annual CGT exemption, and transferring assets between spouses or civil partners before gifting can allow you to use both your allowances.

3. Gifts come in many shapes and sizes

There are many different types of gifts, and the most suitable option will often depend on your circumstances, as well as the needs of the person you’re supporting.

You might choose to gift:

Cash – This can be good for shorter-term goals but may struggle to keep pace with inflation.
Investments – These can offer longer-term growth but can also be exposed to market volatility.
Property or other assets – These can come with additional tax considerations and may be best transferred via a trust, though it’s important to seek advice before doing so.

Another option to consider is to gift some of your pension income. Historically, pensions have sat outside of the IHT net. However, they are expected to fall within estates for IHT purposes from April 2027, meaning they will no longer be as efficient as they once were.

As such, you may want to access your pension fund earlier and use it as part of your gifting strategy. Provided it doesn’t affect your standard of living, this could potentially fall under the gifts from surplus income exemption.

4. Gifting comes with risks, so make sure you’re aware of them

Gifting isn’t without its risks, and understanding the common pitfalls can help ensure your strategy works as intended.

Common risks associated with gifting include:

Not being aware of the “gift with reservation of benefit” rule – If you give an asset away but continue to benefit from it, the gift may still be treated as part of your estate for IHT purposes. For example, if you gift your home but still live in it without paying rent at market rates, it may still be liable for IHT.
Unexpected CGT bills – When you gift certain assets, such as investments or property, they are typically treated as if you’ve sold them at market value, unless you gift them to your spouse. This means any gains could be taxable, even though no money has changed hands, which can lead to an unexpected CGT bill.
Poor record keeping – This is particularly important for gifts from surplus income, as your beneficiaries will need to prove that the gifts were regularly made from your income and didn’t affect your standard of living. Without clear records, it can be difficult to prove this.
Losing control of assets – It’s also important to remember that once a gift is made, it’s usually irrevocable. So, you need to be confident that your own financial needs are fully covered before making significant gifts.

By being aware of these risks and planning carefully, you can help ensure your gifting strategy is both effective and aligned with your long-term goals.

Get in touch

A financial planner can help create a gifting strategy that ensures your continued financial security while also supporting the future of your beneficiaries.

To speak to a financial planner, get in touch.

Email [email protected] or call us on 01625 466360.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.