31 Mar 2025

Who we can help: Case Study – Gifting

One of the most disliked taxes in the UK is Inheritance Tax. This is because most people have already paid a variety of taxes including:

• income tax
• VAT on purchases
• stamp duty and council tax on their property
• corporation tax on any profits in their limited company and then dividends tax to get it out
• capital gains tax on sale of any investments (not in a tax-efficient wrapper) or most other assets that have grown in value

So finally, having accumulated some capital value, if you die with it, you get taxed again. At 40% on everything above £500,000 for an individual, or £1m for a married couple (made up of Nil Rate Band of £325k per person, as well as Residence Nil Rate Band £175k – which is only applicable if there is a property passed on to a direct descendant).

The two obvious ways to mitigate inheritance tax are first, to spend it all (just that tricky little thing of knowing exactly when the end will be), and second is to make a gift that gets the value out of your estate, but exactly how this is done has several nuances to it.

Let’s meet Mrs Ricepops. She’s 78, and her husband died 5 years ago, leaving everything to her. She continues to receive the spouse portion of the late Mr Ricepops’ final salary pension, along with a full state pension, so that her living costs are fully covered – in fact she has found that she’s ending up with an extra £500 per month in her bank account as her income after tax more than meets her fairly simple needs.

Mrs Ricepops has a free-standing 4-bedroom house in Surrey – the average price of which is £987,000, but in fact her home was last valued at £1.2m. She also has:

• £60,000 in various current and saver accounts with her local bank,
• £250,000 in an ISA inherited from her husband,
• £100,000 in her own defined contribution pension.

As things stand, Mrs Ricepops has a total estate value in excess of £1.51m (not including chattels, art, jewellery, and any other valuables) and based on current proposals from the October budget, from April 2027 the pension value of £100k will be added to her estate as well. At that point, an estate valued at £1.61m will be £610k over the current combined nil rate bands and inheritance tax payable by the estate will amount to at least £244k – most of the value of the ISA that Mr Ricepops so diligently built up during his working life.

So, Mrs Ricepops, who has a son (age 50), and a daughter (age 48), and does not actually need the funds herself, could consider making some gifts in order to reduce the size and value of her estate.

In principle, gifts involve a tension between control and access. If the giver is willing to give up both access and control – then an outright gift is often the most simple and effective. As long as Mrs Ricepops survives 7 years after making it, the value of the gift will no longer be part of her estate (and there is a taper from year 3 reducing the total IHT payable). One key thing to think about is the tax implications of withdrawing funds from different wrappers: the total tax payable would be quite different if funds are withdrawn from a pension vs from an ISA.

But family dynamics can be delicate and often also need to be factored in. Mrs Ricepops might be concerned about care costs late in life ballooning and therefore not want to give too much away completely (I would argue this concern should be factored into a financial plan for her projecting her future expenses). In this case, if she wishes to retain some access, a variety of trust and loan structures may be worth considering – as these can allow her to retain control of the original capital which is loaned to the trust but passing on the future capital growth and investment income to beneficiaries of the trust. Careful legal advice may be needed to set this up, and the inheritance tax mitigation effect is usually much smaller as the original loan capital is repayable to the estate on death.

Another possible concern for Mrs Ricepops would be if either of her children was not in a good situation – e.g. they may be headed for a divorce, or they are suffering personal trauma such as substance abuse. In such circumstances, any direct gift to them could become part of the divorce proceedings or otherwise disappear rapidly. She might therefore want to consider gifting to a discretionary trust, which could be done without immediate tax to pay, up to the total of the nil rate bands for her and her husband (potentially 2x £325k – assuming no other large gifts have previously been made). Even gifts above this amount, which then attract a Chargeable Lifetime Transfer charge of 25%, may in some circumstances be preferable to the certainty of 40% tax on death.

A further option that may be considered, is a home equity release loan. Here, Mrs Ricepops could effectively accelerate giving away some of the capital value of her home by taking out an equity release loan against her property and gifting the loan capital to her children or others. She could then opt either to repay the interest over time, to ask her children to repay the interest, or to let the interest accumulate until her death to be repaid in full along with the capital, by her estate. For some, this can be an attractive option, allowing them to stay living in a property with a lifetime of memories, while freeing up capital. The caveat here is that interest can compound rapidly over time, and the total interest costs might significantly diminish what’s left on Mrs Ricepops death.

There are also other ways to invest that may remove the value of an investment from an estate more quickly if a person is much older or in ill-health. One is Business Relief investments which can qualify for relief from Inheritance Tax after being held for 2 years. However the quality and level of risk of the underlying investments involved (which are often quite risky assets, with performance benchmarked against a 40% loss of value due to IHT) as well as the potential for government changes to the treatment of these investments (as we’ve just seen announced to come into effect from April 2026) should be carefully considered.

Finally, it is worth bearing in mind that gifts from excess regular income can be made which remove the funds from Mrs Ricepops estate and could for example support children or grandchildren with regular expenses such as rent or school fees. A careful audit trail is needed to evidence that these gifts are affordable and meet the requirements rather than being disguised ad hoc lump sums – which are subject to the usual 7 year rules where they exceed the £3,000 annual gift allowance.

In all cases where gifts are being planned, care needs to be taken to ensure that Mrs Ricepops is in good health, and that she has not made the gifts in order to deliberately reduce her total assets before looking to obtain state support for care costs (called deliberate deprivation – such gifts may be clawed back from recipients by the local council). In her case, Mrs Ricepops would be very unlikely to receive such council funding anyway, as this support is usually only available to those whose total asset base is valued at less than £23,250.

All of this can sound quite complicated, but the real nuances lie in fully understanding the specific needs and circumstances of Mrs Ricepops, or any other person wanting a well built financial plan, to ensure that the eventual solution chosen closely fits her.

Do you know someone who might want to think about their potential inheritance tax bill, and the potential for gifting or at least tidying up their personal finances? Please suggest they get in touch for a free initial chat about their circumstances and potential planning needs:

Want to discuss this further? Book a free initial chat together.

https://calendly.com/duncan-bw-hoebridgewealth/30min

None of the above is financial or investment advice and you should speak to me or someone else professionally qualified to give you advice specifically tailored to your circumstances. Equity Release will reduce the value of your estate and can affect your eligibility for means tested benefits. The Financial Conduct Authority does not regulate estate and tax planning. Inheritance Tax thresholds depend on your individual circumstances and may change in the future.