How tightening inheritance tax gifting loopholes would impact families ...Middle East

Inheritance tax (IHT), charged at 40 per cent on estates above £325,000, currently allows unlimited lifetime gifts made at least seven years before death.

At present, gifts given less than seven years before death can face a tapering tax rate between 8 per cent and 40 per cent, but the proposed changes would allow the Treasury to target money passed down many years in advance.

Here, we take a look at the existing IHT loopholes which more may wish to take advantage of, should the lifetime gifting cap change.

These are legal structures designed to hold assets outside your estate, often for the benefit of your heirs, while allowing you to retain some financial access during your lifetime.

A loan trust, by contrast, involves lending money to the trust rather than gifting it. The original loan stays in your estate, but any growth on the invested funds is held in the trust – and therefore outside your estate for IHT.

David Stirling, financial adviser and director of Mint Wealth Ltd, said he was seeing these methods increasingly used, noting that bonds are a favoured choice because they offer steady income and flexibility for such planning.

Buying annuities

He explained: “That’s because the value of an annuity immediately falls outside their estate for IHT purposes.”

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The simplest way to reduce IHT is to gift money to loved ones well in advance, Zoe Dagless of Meliora Financial Planning said.

“Gifting lets the younger generation use the money sooner, whether to spend or invest, which can help boost the economy and support things like getting on the housing ladder, she added.

However, she warned that a new lifetime cap on gifts could make it harder for families to pass on wealth efficiently.

Separately, one of the most powerful exemptions applies to transfers between spouses or civil partners, Rachael Griffin, tax and financial planning expert at Quilter, said.

Regular gifts out of income

There is also the ability to make gifts out of surplus income, Ms Griffin said.

She said: “This can be a highly effective way to provide ongoing financial support, such as helping with school fees or regular living costs, while reducing the eventual tax liability.”

He said: “You can gift any amount of money, on a regular basis so long as it is from your income to an individual. This is also not a potentially exempt transfer, so even if you die within seven years, the gift does not become chargeable.”

He explained there is now a “tail” where when you leave the country, you are still within scope of UK IHT for a number of years. But if you are relatively young, you are likely to “outlive the tail”, he said.

Gifting to charities

Gifts to charities, political parties and certain national institutions such as museums and universities are fully exempt. Ms Griffin said: “If 10 per cent or more of your estate is left to charity, the overall IHT rate on the remainder can drop from 40 per cent to 36 per cent.”

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