Are lifetime gifts a tax-efficient way to reduce your inheritance tax estate?

The Government’s 2027 IHT pension reforms will bring most unused pension pots into an individual’s taxable estate, increasing the importance of lifetime gifting as a planning strategy.By Tom Annat – Senior Tax ManagerInheritance tax (IHT) continues to attract significant attention, especially with upcoming changes to pension rules. From April 2027, most unused pensions pots will now be included in a person’s estate for IHT purposes. This is a significant change. For most couples, an IHT allowance of up to £1 million will be available. This is made up of two nil rate bands of £325,000 plus a further resident nil rate band of £175,000 each (where the main home is left to direct descendants). The standard rate of tax is 40% on amounts above the available IHT allowance.As we approach the festive season, lifetime gifting remains one of the most effective strategies for reducing your estate and supporting your family. Cash gifts can help children or grandchildren with university fees, school costs or saving for a first home, while also reducing your potential IHT liability.

Key ways to gift tax-efficiently

• Annual exemption: You can give away up to £3,000 each tax year, which is immediately outside your estate.
• Small gifts exemption: Gifts of up to £250 per person can be given to an unlimited number of people. The amounts will also immediately fall out of your IHT estate.
• Charity relief: If 10% or more of your estate is left to charities in your Will, the IHT rate reduces to 36%.
• Excess income: Regular gifts out of excess income (after paying for usual living costs) will immediately reduce your IHT estate. There is no limit as long as amounts are from income and you have sufficient income left to maintain your usual standard of living. This can be a valuable relief.

Potentially Exempt Transfers (PETs)

Larger lifetime gifts can be made without an immediate tax charge, regardless of value. These are treated as PETs, and become fully exempt if the donor survives seven years. It’s essential that the donor does not retain any benefit from what is given away.There have been discussions around the seven year rule, with the suggestion that this could be extended or abolished altogether. This is just speculation and we would not suggest undertaking tax planning based on rumour. However, clearly lifetime gifting is a useful tool and if you were considering making a gift in any event, you may wish to consider doing this before the forthcoming budget.

The next step

It is important to take tax and financial advice before entering into a transaction. The above describes the position involving cash gifts. Giving away non cash gifts may have other tax implications for the person making the gift, including capital gains tax.Do get in touch for guidance on IHT for non doms from our tax planning team.