Almost three in four wealthy families have not yet made any financial gifts to their loved ones despite this being a way to lessen inheritance tax, fresh research reveals.
Some 73 per cent of affluent individuals say they have never made a gift as part of their annual gift allowance, worth £3,000.
That’s according to wealth manager Brewin Dolphin, which polled those with either a personal income of more than £100,000, investable assets of more than £500,000 or a home worth more than £1million.
It found that while these rich families are worried about inheritance tax just 27 per cent have made a gift in their lifetime.
It jumps to 39 per cent for those aged 65 to 74 and 45 per cent for those aged 75 and over as families start to think about their legacy.
And even though 51 per cent of those polled are most concerned about inheritance tax changes in the upcoming Autumn Budget, just 15 per cent have accelerated gifting in the past year.
A lifetime cap on the amount which can be given away free of IHT during someone’s lifetime is rumoured to be among the slew of changes Chancellor Rachel Reeves is considering for her Autumn Budget.
More than half of wealthy families are concerned about IHT changes in next month’s Budget
How does inheritance tax work?
IHT – Britain’s most hated tax – is levied at 40 per cent on an estate over a £325,000 threshold. Those who leave their property to direct descendants have an extra £175,000 tax-free allowance which means a couple could leave a family home worth £1million free of IHT.
The nil-rate band – which is £325,000 – has been frozen until 2023, which will pull more middle-class families into the death duty net as their estates and property values soar.
But families can give away money and valuables during their lifetime to slim down their estate, which means a lower death duty bill for grieving loved ones.
The donor usually needs to survive for seven years after making the gift for the amount to fall outside of the estate when they die. The exchequer may increase this on November 26 to ten years, experts say.
But everyone gets a nifty £3,000 allowance every year which is inheritance tax free. If you didn’t use it in the previous year, you can carry the allowance forward, but only by one year.
This means that a couple can gift as much as £12,000 in one year completely free of death duties. The seven-year rule does not apply here, so if you die within that period of making these gifts there is still no tax payable.
But this data shows droves of wealthy individuals – who are extremely likely to be leaving their families with an IHT bill – have not yet begun to make the most of this lucrative allowance.
Michelle Holgate, financial planning director at RBC Brewin Dolphin, says: ‘It’s clear that while many affluent individuals are concerned about potential changes to inheritance tax, an overwhelming majority – across all age groups – are still not taking advantage of their annual gifting allowances.
‘Among those who have started gifting, our research shows that children, grandchildren and charities are the most common recipients of financial gifts, highlighting a strong desire to support loved ones and give back to good causes.’
Other little-known tricks to cut your tax bill
If you want to pass on any cash or material gifts, make them earlier instead of later to start the seven-year clock ticking.
If you die within seven-years of making the gift, it won’t fall outside of your estate completely.
However, it could benefit from taper relief. The closer to the full seven years you survive, the less tax your estate needs to pay.
For a payment made in the last three years before death, the full 40 per cent is levied.
But any gifts made four to five years ago face a 24 per cent charge, while those made five to six years before your death have a 16 per cent IHT rate.
Those given six to seven years ago are charged at 8 per cent. Make payments sooner rather than later to lessen the chance that your loved ones will foot a huge 40 per cent tax bill.
Plus, you can make the most of your gifting allowances to pass on wealth tax-free while you are still alive.
Everyone gets a £3,000 annual gift allowance, which is exempt from their estate. But you can also give away an unlimited number of small gifts up to £250, so long as you haven’t used another IHT allowance on the same recipient.
Another trick to reduce the tax bill on your estate is to make a tax-free gift to someone getting married or entering a civil partnership.
You can give £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else.
But these gifts need to be made ‘in consideration of’ a marriage or civil partnership so payments must be made just before it takes place and not after.
Growing numbers of families are also considering putting life insurance policies into trust to pay any potential tax bill.
These pay out to your loved ones when you die and if they are placed correctly into trust they are treated as if they are not part of your estate – and therefore free of inheritance tax.
You can appoint one or more beneficiaries who will be paid the full policy sum when you die.
However, this can be a costly planning tool and may come with risks.
For example, you may forfeit the cover if you stop paying the premiums at any point.
Once you start paying it, it can be difficult to increase your cover should your IHT liability rise. Seek expert advice before going ahead.
Arguably the most generous allowance is known as gifts out of normal expenditure, where you can gift an unlimited amount of money.
Beware, there are strict criteria you must meet. The payment must be regular, out of income and must not affect your standard of living – and you must keep good records.
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