Retirement: Gifting to save inheritance tax

Retirement is an opportune time to take stock of your assets and to think about gifting to save your estate inheritance tax (IHT).

Perhaps your children have now flown the nest and you have downsized and are looking at ways of benefitting the next generation?

The most straightforward IHT exemption is the ‘annual exemption’ where you can make gifts of £3,000 every financial year without any IHT repercussions, and bring forward any unused exemptions from the previous financial year. Another way to look at this is a married couple can gift £12,000 IHT-free every two years.

But there are other exemptions to help you plan for the future. If a person has surplus income then it can be gifted away IHT-free no matter what the amount is, but there are criteria that need to be met.

The gift must be made as part of income and not capital. The person making the gift will need to demonstrate that there is still enough income left to maintain a normal standard of living, after all expenditure is taken into account. There must also be a regular pattern of gifting, such as annual school fees for a grandchild.

Gifts made in contemplation of marriage or civil partnership are exempt at £5,000 from parents, £2,500 from grandparents and £1,000 from others.

Small gits of £250 or less, limited to one cash gift per person, in any one tax year are IHT-free.

Gifts to charity are completely IHT-free and there is also no charge on transfers between spouses.

Higher value gifts are also IHT-free provided that the donor of the gift survives them by seven years. The value then falls out of account. But if death occurs within seven years, the effect is to reduce your IHT nil rate band on death (full value currently £325,000) by the value of the gift. If the original gift was greater than £325,000, taper relief can apply in certain circumstances to minimise the tax burden.