Understanding the role of gifting in Inheritance Tax Planning

Inheritance Tax (IHT) planning is a critical aspect of financial management, especially for those looking to pass on assets to their loved ones without incurring the cost of significant taxation.

One method to potentially reduce your IHT burden is through strategic gifting. However, it is important to consider the significance of gifting in the context of IHT and the importance of meticulous record-keeping for such gifts.

The strategic role of gifting in IHT planning

Gifting can play a pivotal role in reducing the Inheritance Tax liability on an estate. In the UK, IHT is levied on the value of an individual’s estate upon their death.

However, certain gifts made during a person’s lifetime can either be exempt from IHT or potentially become exempt, depending on the circumstances and timing of the gift.

• Exempt gifts: Some gifts are immediately outside of IHT, regardless of when the donor passes away. These include annual allowances (up to a certain amount per year), small gifts per recipient per year, wedding gifts within specified limits, and gifts to charities or political parties.
• Potentially exempt transfers (PETs): Gifts that don’t fall under the exempt categories are typically considered PETs. These gifts can become exempt from IHT if the donor survives for seven years after making the gift. If the donor dies within this period, the PET may become chargeable at a tapered rate, where the tax liability can decrease on a sliding scale depending on the date of their passing.

The necessity of record-keeping for gifts

Keeping detailed records of all gifts made for IHT purposes is essential.

Accurate record-keeping not only ensures compliance with tax laws but also helps in accurately determining the potential IHT liability.

• What records to keep: For each gift, record the date of the gift, the value at the time of the gift, the recipient’s details, and the nature of the gift (whether it is cash, property, or other assets). It is also prudent to note whether the gift falls under any exempt category or is a PET.
• Why keep records: Detailed records are invaluable in case of an HM Revenue and Customs (HMRC) inquiry. They provide clarity on which gifts are exempt, which are PETs, and whether the seven-year rule applies. In the event of the donor’s death, these records assist executors in accurately reporting the estate’s value and determining any IHT liability.

Final thoughts

Effective gifting can be a key strategy in reducing IHT liability, but it requires careful planning and meticulous record-keeping.

It is important to understand the nuances of distinct types of gifts and their implications for IHT.

Keeping comprehensive records of all gifts is not just a matter of compliance – it is a crucial step in ensuring that your estate is managed and taxed according to your intentions.

Considering the complexities of IHT and the strategic significance of gifting, consulting a professional accountant can be highly beneficial.

An accountant can provide tailored advice, help you navigate the intricacies of IHT planning, and ensure your record-keeping is comprehensive and compliant.

Effective planning and record-keeping today can make a significant difference to the financial legacy you leave for your loved ones.

For tailored advice on gifting and IHT planning, please consult one of our accountants.