With pensions set to join the list of assets liable for IHT, for many families, this ends a major tax break and makes effective planning essential. One of the most powerful tools is gifting. However, when done incorrectly, it can wipe out the benefit entirely.
Getting gifting right
Some gifts are exempt straight away, like the £3,000 annual allowance or small gifts under £250. Larger gifts, known as Potentially Exempt Transfers (PETs) escape IHT if you live for seven years after making them. Regular gifts from surplus income can also be tax free, provided they don’t reduce your standard of living and you keep detailed records.
Detailed record-keeping includes evidence of:
- What was given, when, and to whom
- The value of the gift at the time
- The source of the funds (especially for gifts from income)
- Proof that the gift did not reduce your normal standard of living.
This might include bank statements, written notes of intention, valuations and a spreadsheet tracking dates and amounts. Without this paper trail, HMRC could reject the exemption.
The trap – gifts with reservation
The most common pitfall is the ‘gift with reservation of benefit’ – where you give something away but keep using it. For example, transferring your holiday home to your children, but continuing to use it rent-free will keep it in your estate for IHT. Hundreds of families fall foul of this each year, with surprise bills running into tens of thousands.
Protect your legacy – speak to us today
With thresholds frozen and pensions entering the IHT net, please get in touch to review your plans and avoid your gifts backfiring, to make sure your wealth passes on the way you intend.
