According to data provided by HMRC to TWM, the value of cash gifts given away by people for Inheritance Tax (IHT) planning purposes rose to £2.1 billion in 2020/21, a 40% increase from £1.5 billion in 2016/17. The value of cash gifts has risen at an average of 8% a year since 2016.
More families are increasing the value of cash gifts they are passing on to relatives to reduce their heirs’ IHT bills. Broadly speaking but with some exceptions, provided the gift-giver does not pass away within seven years, the cash gift will be exempt from IHT.
In the 2023/24 tax year alone, the government raised £7.6 billion through IHT. This figure is expected to double by 2032, as the median household now holds assets worth £302,500, up 15% in 2020 from £262,400 in 2016.
More families are finding themselves over the IHT threshold, which has been frozen at £325,000 since April 2008, despite household wealth increasing sharply. If the threshold had kept pace with inflation, it would now be £589,000.
Tips for navigating cash gifts:
- Don’t rush: Avoid making hasty decisions. Some advisors have reported seeing an increase in cash gifts ahead of the General Election, fearing potential IHT hikes under a new government. However, it is still important to consider the impact of making a large cash gift on your longer-term financial planning.
- Budget properly: It is essential to ensure that cash gifts will not significantly impact your standard of living. Be prepared for unexpected scenarios before distributing cash gifts.
- Gift earlier: Retaining more money later in life can increase your IHT liability. Consider gifting to family earlier in life (possibly as smaller amounts but more regularly) to distribute more wealth and reduce the IHT burden.
- Discuss as a family: Consider your tax planning collectively to allow the whole family’s view to be taken into account. This is even more relevant if proposed gifting may initially benefit one branch of a family more than another.
- Consider other taxes: Freeing up cash to give away could have other tax consequences, so it is important to seek appropriate tax advice before doing so.
How TWM can help you
If you are concerned about Inheritance Tax impacting your family, our specialist private client solicitors can provide expert advice to help you secure your family's financial future.
To discuss your options, please contact our Private Client team today for an initial no-obligation consultation.