Lifetime Gifting and New Year’s Resolutions: A strategic approach to Inheritance Tax

As we approach the end of another year, I find myself, like many of my clients, reflecting on what really matters. For many, it’s family, financial security and the peace of mind that comes from knowing their affairs are in order.

If you’re thinking about your legacy, now is the perfect time to consider how lifetime gifting can play a role in your inheritance tax (IHT) planning.

Why Lifetime Gifting matters

Every January, I speak with people who are determined to “get their house in order”, and who are looking to review their wills and succession planning strategies.  Lifetime gifting remains one of the most effective tools for reducing the size of your taxable estate. By transferring wealth during your lifetime, you can potentially mitigate the 40% IHT charge that applies to estates above the nil-rate band (£325,000, plus any residence nil-rate band where applicable).

The government’s Autumn Statement this year confirmed that the familiar IHT gifting rules and exemptions are here to stay, at least for now. That means you can still take advantage of:

• Annual Exemption: You can gift up to £3,000 each tax year, with any unused allowance carried forward for one year.
• Small Gifts: Gifts of up to £250 per person per tax year are exempt.
• Wedding or Civil Partnership Gifts: Up to £5,000 for a child, £2,500 for a grandchild, and £1,000 for others.
• Gifts Out of Surplus Income: Regular gifts made from surplus income, without affecting your normal standard of living, are immediately exempt from IHT – no seven-year survival period is required. This exemption is particularly powerful for high earners and retirees with surplus income streams.

These rules provide certainty for those planning ahead, despite speculation about future reforms such as lifetime caps or changes to the seven-year rule.

Tax implications: What you need to know

Under current law, most lifetime gifts are treated as Potentially Exempt Transfers (PETs). If you survive seven years after making the gift, it falls outside your estate for IHT purposes. If you die within seven years, to the extent that any gift exceeds the available nil-rate band, taper relief may reduce the tax payable on the gift:

• 3–4 years: 32%
• 4–5 years: 24%
• 5–6 years: 16%
• 6–7 years: 8%

However, gifts out of surplus income bypass this rule entirely and are exempt from the outset if certain conditions are met. HMRC will expect detailed records to demonstrate a pattern of gifting and that your standard of living was maintained.

Legal considerations

While tax efficiency is important, legal implications should not be overlooked:

• Gifts with Reservation of Benefit: If you gift an asset but continue to benefit from it (e.g., living in a property rent-free), HMRC will treat it as part of your estate for IHT purposes.
• Capacity and Documentation: Ensure you have the mental capacity to make gifts and keep clear records. Consider formal deeds for significant transfers.
• Impact on Succession Rights: In Scotland, legal rights for children and spouses may override your intentions if gifts are perceived as attempts to defeat claims.
• Trust Structures: For larger gifts, trusts can provide control and asset protection, but they introduce complexity and potential charges under the relevant property regime.

New Year’s resolution: Make gifting part of your plan

The start of a new year is the perfect time to:

• Review your estate and identify opportunities for tax-efficient gifting.
• Establish a regular pattern of gifts from surplus income.
• Update your will and consider whether trusts or other structures are appropriate.
• Keep meticulous records to support any future HMRC claims.

How we can help

With IHT receipts at record highs and further reforms on the horizon, proactive planning is essential. Lifetime gifting, done correctly, can help you achieve your financial goals while securing your family’s future. Please contact Emma.Read@andersonstrathern.co.uk for guidance on these matters.