Give generously to help escape inheritance tax

New figures show that families who lost a loved one paid a record £5.2bn in inheritance last year. Wills and probate expert Jill Rushton explains how to mitiga…

Inheritance tax


The inheritance tax bill has soared in recent years – rising by a stunning 92 per cent since the Treasury collected £2.7billion in 2010-11.

The total number of liable estates is also up, with 24,500 estates liable last year.

So, at a time when the Treasury is collecting more from the estates of bereaved individuals, what can you do to ensure that your family and friends benefit instead?

One answer is to give more of it away now.

Nil-rate allowance

You may be aware that if your estate is worth more than £325,000 – known as the nil-rate allowance – the standard 40 per cent inheritance tax rate applies. This threshold increases to £450,000 if you are leaving your home to your children or grandchildren.

But there are a number of less well-known allowances that allow you to gift your money now and avoid your family having to pay tax on it later – provided you survive for seven years or more.

Under the gift allowance rules, you can give away up to £3,000 per tax year which could be free of inheritance tax provided your death is more than seven years later. Any unused annual allowance can be rolled forward up to one tax year, so you could gift £6,000 if you didn’t use your allowance the previous year.

When you make these gifts, they are known as ‘potentially exempt transfers’ (PETs). If you pass away within the seven years, they become ‘failed PETs’.

If your estate is worth more than the £325,000 or £450,000 limits – depending on which one is applicable – inheritance tax will be charged on failed PETs on a tapering scale

There are also other gifts you can make to escape inheritance tax. You can give a marriage gift of up to £5,000 to your children as long as you do it before the big day, and not after. The rules also say you can give wedding gifts of up to £2,500 to each grandchild and £1,000 to friends and other relatives.

These don’t have to be in cash – you could contribute towards the wedding or buy some very fabulous presents for the lucky bride and groom.

An unlimited number of gifts of up to £250 to different people is also allowed in a year, so you can be generous to many family members, friends and colleagues, if you feel so inclined.

Exemptions and allowances

Gifts to charities, political parties and certain clubs are also exempt, irrespective of when they took place. So why not support some of your favourite good causes?

Your inheritance tax rate might also be reduced if you donate one-tenth of your net wealth in this way.

Another allowance is gifts towards a pensioner’s, ex-spouses or child in full-time education’s living costs.

Finally, another rule says you can make gifts from your ‘surplus income’ and these will also be exempted from inheritance tax.

However, for this exemption to apply, you must maintain your normal standard of living and the gift must be taken out of your regular income.

However, this last allowance is a complicated one and I’d highly recommend getting financial advice to avoid falling foul of the rules.

Whatever form of gifting you take advantage of, I also strongly advise keeping detailed records so your beneficiaries can prove the exemption applies after you’ve passed away.

Jill RushtonAbout the author

Jill Rushton is Head of Wills and Probate at national law firm Stephensons. She is accredited by the Society of Trust and Estate Practitioners. Jill is also a member of Solicitors for the Elderly and is a Dementia Friend.

Last modified: October 2, 2018

Written by 4:28 pm Tax