New analysis shows Britons are now giving more than £2billion a year in cash gifts to reduce IHT bills, up a stunning 40 percent in just five years. This is likely to increase steadily as IHT thresholds remain frozen while property and stock market values rise.
And with Labour chancellor Rachel Reeves potentially tightening rules on gifting and removing allowances, many families are likely to go into overdrive as they seek to escape the hated “death tax”.
New analysis from private wealth specialists TWM Solicitors shows Britons made gifts valued at £2.1billion in 2020/21 to reduce the amount of IHT heirs will have to pay when they die, up from £1.5 billion in 2016/17.
Yet Britons are still paying record amounts of IHT, with the government raising £7.6 billion in the 2023/24 tax year. This figure is expected to double by 2032.
More families are getting caught in the IHT net with the nil-rate band frozen at £325,000 since April 2009. If the threshold had kept pace with inflation, it would now be £589,000.
No wonder many families feel a sense of injustice.
More middle income households risk getting caught as they now own assets worth £302,500 in total, up £262,400 in 2016.
Gifts are entirely IHT-free if you live for seven years after making them, under potentially exempt transfer rules. The tax charge falls on a sliding scale, so there’s still a benefit if you only live for a few years after making the gift.
Many are also making use of annual gifting allowances, as everyone can pass on up to £3,000 a year with instant IHT exemption, plus smaller gifts of £250 to as many people as they like.
The £3,000 allowance hasn’t been increased in a staggering 40 years, so it’s worth a lot less than it was.
Giving cash gifts to family members in your lifetime can be an effective and simple strategy to cut your IHT bill, said Caroline Foulger, partner at TWM Solicitors. “If timed well, gifts allow individuals to distribute more wealth to loved ones and reduce their IHT burden.”
She urged people to consider gifting money to loved ones earlier in life, as many affluent families keep more money in their estate for longer than they reasonably need. “That leaves their heirs with a far bigger IHT bill.”
Foulger saw a surge in gifting during the general election, as families panicked ahead of a potential Labour tax raid, but warned against making hasty decisions. “Before you do that, you need to prepare a proper budget based on different scenarios.”
She said parents and grandparents need to ensure that any gifts they give do not hit their own standard of living unduly. Once given, money and assets cannot easily be recalled.
Foulger said families must consider their tax planning collectively. “Even within a family unit, views on taxation can vary wildly.”
Do not panic unduly. Today, only four percent of deaths trigger an IHT bill, although the Office for Budget Responsibility forecasts this will climb steadily to 6.3 percent by 2028.
Laura Hayward, tax partner at Evelyn Partners, said the “great wealth transfer’ is underway as the older, weather generation makes lifetime gifts to their families. “Governments will be tempted to tap into this to plug gaps in the public finances.”