Back in March 2021, the chancellor used his budget to freeze the nil-rate band (£325,000) and the residence nil-rate band (£175,000) for Inheritance Tax (IHT) until at least 2026.

While the thresholds apply per individual, effectively doubling to £1 million for a couple, FTAdviser reports that the “great wealth transfer” will see around £5.5 trillion pass from baby boomers to millennials over the next 30 years.

With so much money passing between generations, the government’s IHT take is likely to rise.

There are a few simple ways for your clients to lower their IHT liability. Gifting lowers the value of an individual’s estate and can be used to decrease wealth below the IHT threshold. Your clients might also consider gifting to charity. Charitable donations are not only IHT exempt but they could also lower the rate of IHT payable.

Here’s how.

IHT is payable at 40% on the value of an estate above the threshold

Your clients will only pay IHT on the value of their estate above the frozen nil-rate bands. Where their estate does exceed the threshold, tax is payable at 40%.

Your clients can lower the value of their estate through gifting, but they will normally need to survive a further seven years from the date the gift is made for that gift to be tax-free. HMRC exemptions to this rule do apply, however.

These include:

  • The annual exemption – This allows for gifts of up to £3,000 to be made tax-free in a given tax year. Any unused allowance can be carried forward for one year and the exemption applies to individuals, meaning that couples can gift £6,000.
  • Small gifts – Individuals can gift up to £250 to as many people as they like during the tax year, as long as that person hasn’t already received your client’s £3,000 annual exemption.
  • Gifts from income – Regular gifts, such as into a child’s JISA, are covered by the normal expenditure out of income exemption. Your client must be able to prove that the gift is regular, made from normal income, and does not affect their standard of living.

Your clients might also consider making tax-efficient donations to charity.

Gifting to charity can lower the rate of IHT your clients pay

Gifts made to charity are free of IHT. This means they lower the value of your client’s estate for IHT calculation purposes, without the need to wait seven years from the date the gift is made. Large gifts could make the difference between being liable for IHT and remaining below the threshold.

But gifting to charity has another benefit too. If your clients gift more than 10% of the net value of their estate to charity, the rate of IHT payable on any remaining estate above the threshold reduces to just 36%.

Your clients might also opt to leave a charitable legacy in their will.

They could request a specific amount (or individual items) be left to a charity they choose through a pecuniary legacy.

Equally, they could request to leave a residual legacy, a donation comprising the value of their estate once all other bequests have been made, taxes paid, and fees covered.

A contingent legacy, meanwhile, allows a charitable donation to be made only if another event does not occur. The portion of an estate intended for a beneficiary might go to charity only in the event of the beneficiary’s death, for example.

There are other ways to give to charity too 

Giving from earnings

Your clients might opt to use a payroll-giving scheme to donate to charity from their pre-tax pay. This must be done via their employer and the employer must run a “Give as you Earn” scheme.

If they do, employees will receive tax relief on their donation, based on the rate of tax they pay, meaning a £100 donation would cost a basic-rate taxpayer just £80.

Using Gift Aid to give through purchases

Clients that pay tax in the UK can gift to a good cause using Gift Aid, thereby allowing their chosen charity to reclaim the basic rate of tax paid on that donation.

The individual donating may need to complete a form or tick a Gift Aid box, but doing so means that every £1 donated is worth £1.25 to their chosen charity.

Donating (or selling) land, property, or shares

Donating land, property, or shares to charity can allow your client to receive both Income Tax and Capital Gains Tax (CGT) relief, in some circumstances.

Income Tax relief can be claimed via your client’s self-assessment tax return. CGT relief, meanwhile, will depend on how much the land, property, or shares are sold for.

Get in touch

Charitable giving can benefit a cause your clients care about while also being incredibly tax-efficient.

If you have clients who would benefit from help managing their estate, whether through making the most of HMRC gifting exemptions or through charitable giving, please get in touch. Email or call 0116 240 7070.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.