Lifetime gifts and inheritance tax: why planning ahead matters

Inheritance Tax is charged on the value of a person's estate on death, including property, savings, investments and other assets. While many assume IHT only affects the very wealthy, rising property prices and increasing asset values mean that more families are finding themselves within its scope.

Every individual currently benefits from a Nil Rate Band (NRB) of £325,000, meaning no Inheritance Tax is payable on the first £325,000 of their estate. In addition, where a family home is left to direct descendants, an additional Residence Nil Rate Band (RNRB) of up to £175,000 may also be available.

Married couples and civil partners can often transfer any unused NRB and RNRB to the surviving spouse or civil partner. Subject to eligibility, this can allow up to £1 million to pass free from Inheritance Tax on the second death.

One way of reducing the value of an estate is by making gifts during your lifetime. As well as helping children or grandchildren when they may need financial support the most, lifetime gifting can also be an effective Inheritance Tax planning tool.

Each tax year, individuals can make gifts of up to £3,000 using the annual exemption. If unused, this exemption can generally be carried forward for one tax year, potentially allowing gifts of up to £6,000. There are also a number of other exemptions, including small gifts of up to £250 per recipient, subject to the relevant conditions.

Larger gifts are commonly made as Potentially Exempt Transfers (PETs). In broad terms, if you make a gift to another individual and survive for seven years from the date of the gift, the value of that gift will usually fall outside your estate for Inheritance Tax purposes. If you die within seven years, however, the gift may still be taken into account when calculating any IHT liability.

For healthcare professionals, estate planning can be particularly important. Many have accumulated significant wealth through property, pensions, investments or practice ownership, yet may not have reviewed how these assets will be treated on death. While pensions often sit outside the estate for Inheritance Tax purposes, other assets may not, making it worthwhile to review your position regularly as your circumstances change.

Lifetime gifting is only one aspect of effective estate planning. More complex situations - such as business or partnership interests, trusts, agricultural or business relief, overseas assets, gifts from surplus income and succession planning for family businesses—are governed by different rules and require specialist advice.

A review of your estate planning does not need to be complicated, but it can provide reassurance that your affairs are structured as tax-efficiently as possible and that your loved ones are protected.

If you would like to discuss Inheritance Tax planning, lifetime gifting or any aspect of estate planning, please contact Pallvi Gami in our Private Client team.