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Three in Four Rich Families Avoid Inheritance Tax Gifts

By Newby

Understanding the Trends in Inheritance Tax Planning Among Wealthy Families

New research has revealed that a significant number of wealthy families have not taken advantage of financial gifts to reduce their inheritance tax (IHT) liability. According to findings from wealth manager RBC Brewin Dolphin, 73% of affluent individuals with personal incomes over £100,000, investable assets exceeding £500,000, or homes valued at more than £1 million have never made a gift under their annual £3,000 allowance.

Despite concerns about IHT, only 27% of these individuals have made any gifting during their lifetime. The percentage increases with age, reaching 39% for those aged 65 to 74 and 45% for those 75 and older. This suggests that as people grow older, they begin to consider their legacy more seriously.

While 51% of those surveyed are most worried about potential changes to IHT in the upcoming Autumn Budget, only 15% have accelerated their gifting activities in the past year. Rumors suggest that the government may introduce a lifetime cap on gifts to avoid IHT, which could impact how families plan their estates.

How Inheritance Tax Works

Inheritance tax is often referred to as Britain’s most hated tax, with a rate of 40% on estates exceeding the £325,000 threshold. Those leaving property to direct descendants receive an additional £175,000 tax-free allowance, allowing a couple to pass on a family home worth £1 million without IHT.

The nil-rate band of £325,000 has been frozen until 2023, potentially increasing the number of middle-class families affected by IHT as property values rise. However, individuals can give away money and valuables during their lifetime to reduce the size of their estate, thus lowering the IHT bill for their loved ones.

To ensure that a gift falls outside of the estate when the donor passes away, the donor must survive for seven years after making the gift. Experts predict that this period might be extended to ten years starting November 26. Additionally, everyone receives a £3,000 annual gift allowance that is free from IHT. If unused in one year, it can be carried forward for one year, allowing couples to gift up to £12,000 in a single year without incurring IHT.

Strategies to Minimize Inheritance Tax

There are several strategies that can help minimize IHT:

  • Early Gifting: Making gifts earlier rather than later helps start the seven-year clock ticking. If the donor dies within seven years of making the gift, the amount may still be subject to IHT, but taper relief applies depending on how long the donor survived after the gift was made.
  • For gifts made in the last three years before death, the full 40% rate applies.
  • Gifts made four to five years prior face a 24% charge.
  • Gifts made five to six years ago incur a 16% IHT rate.

  • Gifts made six to seven years before death are charged at 8%.

  • Small Gifts: Individuals can also give unlimited small gifts up to £250, provided they haven’t used another IHT allowance on the same recipient.

  • Gifts for Marriage or Civil Partnership: A tax-free gift can be given to someone getting married or entering a civil partnership. The amounts vary depending on the relationship:

  • £5,000 to a child
  • £2,500 to a grandchild or great-grandchild
  • £1,000 to anyone else

  • These gifts must be made "in consideration of" the marriage or civil partnership and should occur just before the event.

  • Life Insurance Policies in Trust: Some families are considering placing life insurance policies into trust to pay any potential IHT bill. When structured correctly, these policies are treated as separate from the estate, making them free from IHT.

  • Gifts Out of Normal Expenditure: This allows for unlimited gifting, provided the payments are regular, come from income, and do not affect the donor’s standard of living. Keeping good records is essential to meet the criteria.

Conclusion

Despite the availability of various strategies to reduce IHT, many wealthy individuals remain unaware or hesitant to take advantage of these opportunities. As the potential for changes in IHT policy looms, it becomes increasingly important for families to plan ahead and make informed decisions about their financial legacies. Seeking expert advice can help navigate the complexities of IHT planning effectively.