Ask Jenny Ross: How Much Can I Give to Limit the Risk of Inheritance Tax?

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Less than 4% of all deaths in 2019-2020 (around 23,000) resulted in an inheritance tax bill

ANSWER: As Gareth pointed out, the inheritance tax rules are devilishly complex, so I’ll start by recapping the basics: if your estate is worth less than £ 325,000, there will be nothing to pay to HMRC.

If you leave your home with a child or grandchild, you get an additional allowance of £ 175,000. This brings your total tax-free allowance to £ 500,000, or £ 1million for a couple.

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Estate tax revenue totaled £ 5.2 billion in 2019-2020, but it came from a relatively small number of estates. Less than four percent of all deaths (about 23,000) resulted in a bill, but the 40 percent tax rate means those bills can be significant.

You can reduce what your heirs might have to pay by donating assets during your lifetime – keep in mind that there are limits to how much you can donate tax-free. These include your ‘annual exemption’ of £ 3,000 per tax year, which you can give to any number of people, as long as the total amount offered remains below £ 3,000.

You can also make an unlimited number of tax-free gifts worth up to £ 250 each, but not to anyone who has benefited from your annual £ 3,000 waiver.

If your child gets married or starts a civil partnership, you can give them up to £ 5,000 tax-free as a wedding gift. For grandchildren the limit is £ 2,500 and for all other couples £ 1,000.

Then there are the income donations. As you point out, these can also be exempt from inheritance tax, but the rules are quite different from the gift allowances I just went through.

There is no limit to how much you can donate from your income, but other strict criteria apply. Most importantly, donations must be paid from excess income – in other words, they cannot have any impact on your standard of living. They should also be part of your “normal expenses” and be paid regularly. Examples that HMRC gives on their website include paying your child’s rent and providing financial support to an elderly parent.

A word on the semantics: “normal” in this context means normal for you and not for the average person. “Income” can include employment and retirement income as well as savings interest, dividends, and rent payments. Payments from insurance policies are generally treated as capital payments and therefore would not qualify for the exemption, nor would donations of stock, jewelry or other “capital”.

HMRC will be looking for a ‘donation model’. If you die soon after starting to make payments, there will need to be some evidence that the payments were genuinely meant to be the first in a long series. For this reason, it’s worth stating your intentions in writing when you start making payments.

As part of its assessments, HMRC will consider the amount donated, the frequency of the gifts, the nature of the gifts and who receives them. They don’t necessarily need to be monthly payments – for example, you can give gifts from your income to your children on their birthday every year as well as at Christmas. These would form a model of donation.

The amount doesn’t always have to be the same either. HMRC says regular giveaways should be “of comparable size,” but recognizes that some sources of income can be variable (like stock dividends), as can specific costs you might cover through regular giveaways (like grandchildren’s school fees).

Since the judgment as to whether donations are considered normal income expenses will be made when you are no longer there, it is a good idea to keep a written record of all donations you make each tax year. to make it easier for executors to report them to HMRC (using a form called “Gifts and Other Transfers of Value”, Annex IHT403, if you wish to consult it) and to cope with any challenges.


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