You’re seeing a lot of speculation in the press about further changes to inheritance tax (IHT) in the upcoming Budget, including a cap on the amount you can give to your loved ones. Would you be better off making gifts before the Budget date?
Tax raid on the horizon
There’s no doubt the Chancellor will try to squeeze more tax out of the public in the next Budget on 26 November 2025. Given the promises made on income tax, VAT and NI, speculation on changes to inheritance tax (IHT), capital gains tax (CGT) and property taxes are rife. Don’t fall victim to scaremongering, you need to be worth more than £325,000 (or £650,000 for a married couple) before you’re caught by IHT. On top of that, if your net worth is less than £2m, you’re entitled to the residence nil rate band (RNRB) worth up to £175,000 (or £350,000 for a married couple) if you leave your home to your children/grandchildren etc. (see Further information).
Tip. Married couples can pass up to £1m to the next generation free from IHT and the amount is higher for business owners and farmers who own assets eligible for business property or agricultural property relief.
Predicting the future
Unless you have a crystal ball we wouldn’t recommend making rash financial decisions that you may regret later down the line.
Trap. If you hastily divest yourself of assets, you could end up with a surprise CGT bill or, worse, not enough cash to maintain your lifestyle.
Tip. One way to avoid CGT is by gifting cash or ISA wrapped shares.
Hindsight shows that rumoured changes often don’t materialise, the measures are watered down or subject to transitional rules. Therefore, you should only consider making gifts that you were planning to make anyway or that you are certain you won’t regret if the IHT rules are left alone come Budget Day.
Gifting top tips
If you give something away and you live for at least another seven years there’s no IHT to pay. What is less well known is that this restriction doesn’t apply to all gifts such as those covered by exemptions (see Further information), e.g. the annual exemption of £3,000 per year.
Tip. If you didn’t use it last year, you can bring forward last year’s allowance such that you can gift £6,000 this year – so that’s £12,000 for a couple.
Tip. Gifts out of excess income are also overlooked, e.g. if you make regular payments towards your grandchildren’s school fees and can afford to do so from income (not capital), the amount paid is also exempt.
You should also review your eligibility for reliefs and nil rate bands. If you’re worth more than £2m, see if you can make gifts to get under the threshold.
Tip. The seven-year rule doesn’t matter when looking at eligibility for the RNRB. For example, if you’re worth £2.4m, you can gift £400,000 and immediately become entitled to the full RNRB, saving IHT of £70,000.
Tip. If the seven-year rule applies to your gift, then make it as soon as possible to give yourself the best chance of beating the clock, and if new restrictions are announced on Budget Day you’ll have beaten the Chancellor too.
Tip. For larger gifts consider taking out insurance for the amount of IHT exposure. If the worst happens, the insurance will cover the tax bill. Naturally, the younger you are the lower the premiums are likely to be.
Check whether your net worth exceeds the IHT nil rate band (currently £325,000) and residence nil rate band. If it does, make use of exemptions such as gifts out of excess income to get around the seven-year rule.
Further information
Further information on gift exemptions
HMRC’s guidance: RNRB
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.