There could be a lot of people set to receive an extra generous gift under their tree this Christmas, as individuals look for ways to reduce their estate's inheritance tax (“IHT”) liability following Rachel Reeve's Autumn budget. 

On 30th October 2024, the new Labour government's first budget announced plans for pensions to be included in the value of a person's estate for the purposes of calculating IHT liability, along with a reduction to Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”). 

Previously, a person’s pension would not form part of their estate provided they had nominated a beneficiary. Those who had the means would avoid using their pension, and instead spend their savings and investments. This would reduce the size of their estate (and therefore their IHT bill), whilst still ensuring that they could pass on a large amount of capital in the form of their pension to a loved one free from IHT. The majority of agricultural or personal business assets would usually qualify for 100% relief and would also pass free from IHT. With pension pots now set to form part of a person’s estate, and a reduction to APR and BRP, that estate planning strategy looks set to go completely up the chimney! The inclusion of pension pots into an individual’s estate will also result in a lot more estates meeting the threshold to pay IHT, which would not have previously. With that in mind, we have seen an increase in individuals worried about IHT and looking to gift property, shares, businesses and cash to loved ones in their lifetime in hope of reducing their estate’s IHT liability.

Gifting is a great way to reduce the value of your estate's IHT liability, and means you get the benefit of still being around to see your beneficiaries enjoy and benefit from the gift you have provided. However, as with all things tax, it is unfortunately not as simple as it seems, and individual's must ensure they know the rules around gifting to avoid ending up on HMRC's naughty list and their estate still having to pay IHT on the asset they have gifted.

Every individual has an allowance of £325,000 to pass on free from IHT (known as the ‘Nil Rate Band’), plus up to an additional £175,000 allowance if they leave their main residential property to a direct descendant (the ‘Residential Nil Rate Band’). These allowances are transferable between spouses so a surviving spouse can inherit their partner’s unused allowances. The value of your estate over your allowances will then be subject to IHT at 40%.

The good news is there is no limit to the amount of gifts you can make in your lifetime, the only caveat is you must survive 7 more Christmases (or 7 full years to be exact) from the date of the gift for its value to fall outside of your estate. If you pass away before 7 years has passed, then the value will still form part of your estate, with taper relief potentially reducing the percentage rate of tax depending on how long it has been since the gift was given and the quantum of the gift.

There is also no limit on regular gifts you can make out of your income, however, you must ensure that the regular gifts you make should be seen as part of normal expenditure and must be made from surplus taxable income. You must therefore keep a record of income and expenditure and ensure that the gifts you provide do not result in you being left short.

Those looking to gift any of their estate must also ensure they don't fall foul of making a Gift with Reservation of Benefit AKA a ‘GROB’. If you gift an asset, you must give away all beneficial interest in it for it to be considered outside of your estate. If you retain a beneficial interest in the asset the value will still be considered inside your estate for IHT purposes. The most common example of this we see is individuals gifting property to their children but continuing to live in the property.

Individuals must also be aware that gifting an asset is deemed as a disposal and could therefore trigger a Capital Gains Tax liability.

Everyone's tax position is different. Just as a personal gift is usually better, personal estate planning advice is also preferred. There are different rules and reliefs depending on what type of asset is involved, whether you are married or unmarried, your domicile/residence status etc. It is always worth getting tailored advice to ensure that you leave your estate in the most tax efficient way possible.

If you are considering gifting any assets this festive season or you would like general estate planning advice, JMW's Private Client department would be more than happy to help provide you with advice for your personal circumstances.

Merry Christmas and happy gifting!