Gifts and Inheritance Tax

The most efficient way to save on tax is to use a gift or gifts to avoid inheritance tax.

However, using gifts to avoid inheritance tax is not done as a matter of course since generally people would rather retain control over their finances.

The effect of gifts for inheritance tax purposes is to reduce the value of your estate, so that less tax is payable on your death. However, there is a catch that for the gifts to allow you to avoid the inheritance tax, you must survive for 7 years in order for the gift to be tax free. Should you die within this 7 years, then the gifts would be liable to inheritance tax.

If you die within 7 years of making inheritance tax gifts, the value of the gifts will reduce the value of your inheritance tax threshold. This would therefore have the effect of increasing the taxable value of your estate. A common misconception in this area is that the tax on inheritance tax gifts reduces on a sliding scale. This is only true if the inheritance tax gifts exceed the threshold. Many advisers get this wrong. However, even if the person who makes the gifts dies within 7 years, any growth in that asset will be outside of their estate for inheritance tax purposes. Inheritance tax insurance can be arranged to cover the potential tax liability on any gifts.