In total, 1,080 estates paid IHT on gifts in the 2021/22 tax year (the most recent year that data is available) – compared to less than 590 estates in 2011/12.

Planning can reduce avoidable IHT bills

Many of these tax bills could have been prevented (or at least reduced) with more effective planning. For example, IHT can be avoided on many gifts if they are made within seven years of the donor’s death. However, on some occasions, even gifts made more than seven years ago can negatively affect the final IHT bill payable on death if not planned correctly. This is particularly the case when making gifts to trusts and to people, where the tax outcome can be affected by the order of the gifts (good advice often pays for itself).

Gifting at the right time

Individuals can currently gift up to £3,000 each tax year IHT-free under the annual exemption. They can also give up to £250 per recipient annually through the small gift exemption and there are further gift exemptions available to those who are marrying or forming a civil partnership – the level of the allowance depends on how closely related they are to the happy couple.

In addition, regular payments from surplus income are exempt from IHT, provided they do not affect the donor’s usual standard of living. These exemptions can be used in combination to reduce an estate’s taxable value.

If a family ends up with an IHT bill for a gift, then, leaving aside completely unexpected deaths, there was likely a missed opportunity to reduce that tax. Most often, this is due to the gift being made too close to the donor’s death.

People often ‘undergift’ out of caution, which is understandable. Many overestimate their living expenses, and hold back, worrying that giving too much could affect their quality of life.

Tips to avoid unnecessary IHT on gifts:

• Start early: gifts made at a younger age are more likely to fall outside the seven-year IHT window.
• Use your allowances: do not overlook the £3,000 annual exemption and £250 small gifts allowance. For higher earners, the ability to give away surplus income can be the most powerful weapon in your IHT arsenal.
• Document gifts properly: especially for gifts made from surplus income.
• Seek professional advice: IHT rules are complex, and informal guidance can lead to costly mistakes.

With house prices rising and growing personal wealth accumulation, more estates are being dragged into the IHT net – leaving many families with surprisingly large liabilities. Even modest planning can make a significant difference.

If you are unsure about what your IHT liabilities are – or what your estate may owe after your death – it is important to seek professional advice. This can help ensure that any wealth built up during your lifetime is protected and passed on to your loved ones.

Our role is not to tell you to give away all your wealth to avoid tax. Instead, we will help you to understand what your potential liabilities might be and how you can plan sensibly to mitigate them. How far you choose to go is entirely up to you – our aim is simply to ensure that every decision you make is a well-informed one.

How TWM can help you

At TWM, we can advise you on the steps you should take to protect your estate and reduce unnecessary inheritance tax. Our specialist Private Client team is on hand to support you and your family when you need us. To discuss your requirements, please contact our Private Client team today for an initial, no-obligation consultation.