Inheritance tax can be reduced through gift deduction

Inheritance tax (IHT) is often said to be the most hated tax in the UK, despite less than 4 per cent (3.73 per cent) of inherited estates paying inheritance tax in the 2020-2021 tax year. many.

Many people want IHT to be abolished completely, and a survey of 2,000 people over 40 by financial planning expert Abdon found that 7 out of 10 (71%) believe that inheritance tax should be abolished. It turns out that I think I should.

As for the reasons for this belief, 39% said they thought it was unfair, 16% said it was outdated, and 15% said it was not appropriate for modern life.

ABRDN financial planning expert Shona Rowe warned that more people will be hit by the tax after years of soaring property prices across the country due to threshold freezes.

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She said: “Thanks to years of soaring real estate prices across the U.S. and the freezing of the ‘zero rate’ band, which began in 2009 and will continue until at least 2028, more people are caught in the inheritance tax net, and the total amount owed is It’s increasing every year.”

However, there are ways to legally reduce the burden of inheritance tax.

“By understanding the rules regarding inheritance tax, you can reduce or eliminate your inheritance tax burden,” Lowe explained.

“The ‘right’ way to use gift facilities, establishing a trust or business relief that allows individuals to pass money to loved ones depends entirely on their individual circumstances. ”

Financial planning experts warn that the best way to navigate inheritance tax and estate planning depends entirely on individual circumstances, adding:

“Planning your finances, creating a will, and incorporating gifts into your financial plan can help you save on taxes and give you the confidence that you are supporting your loved ones as best as possible, now and in the future. .”

Inheritance tax gift regulations

Gift allowances come in many forms and allow people to gift part of their estate to loved ones without getting caught in the inheritance tax net.

“Intervival gifts are a way to reduce the value of an estate and reduce potential inheritance tax burdens,” says Ms Rowe.

‘Some gifts are exempt, which means their value quickly disappears from your estate. This may be because it corresponds to the amount of money.

“Or maybe it’s because you qualify for the ‘small gifts exemption’, which allows you to give as many gifts as you like, up to £250 a year, as long as each gift goes to a different person.

“You can also donate additional income that you don’t need to fund your current lifestyle. However, that’s the pattern of giving, and the value of regular gifts quickly disappears from your estate. .”

These gift allowances help reduce inheritance tax, but it is also possible to gift a portion of your estate during your lifetime without being subject to inheritance tax.

This is where the seven-year rule comes into play. If the gift giver dies within seven years, the beneficiary must pay inheritance tax at a decreasing rate.

“If you make a gift that does not fall under one of these exemptions, you must survive seven years after the gift for the full value to leave your estate,” Lowe explained.

The current standard inheritance tax rate is 40%, and this rate will be levied if the person dies within three years of making a gift that is not covered by another allowance.

If you die within three to four years of making the gift, the tax rate on the gift is 32%.

HMRC sign outside government department

Inheritance tax can be legally reduced through gifts etc.


In years 4 to 5, the rate is 24 percent, and in years 5 to 6, it is 16 percent.

If the number of years between gift and death is 6-7 years, the percentage is 8%, but if it is more than 7 years, it is zero.

If the value of your estate is below the threshold (currently £325,000, but some people may be able to increase this), you will usually not have to pay inheritance tax.

Similarly, if a person leaves everything above the threshold to a spouse, civil partner, charity or local amateur sports club, there is usually no inheritance tax due.

Ms Rowe said: “It is important to emphasize that gifts do not have to be given only to other people.

“You can also donate it to charity, but in that case it’s exempt and its value leaves your estate immediately. It can also be put into a trust.”

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