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How to use the Christmas season to cut your IHT bill

How to use the Christmas season to cut your IHT bill

Here are tips on giving gifts and spending your money to avoid unnecessary inheritance tax when the time comes

Almost everybody loves Christmas while most people hate inheritance tax (IHT), which is the most unpopular levy of all. Here’s some good news on both fronts. You can use the thing you love, Christmas, to pay less of the thing you hate, which is IHT. At the same time, you can give your loved ones a real treat during the festive season.

"You could make this the best Christmas ever and spare loved ones a brutal 40 per cent tax charge in future"

How is it possible to do all of these things? By making careful use of rules that allow you to make gifts to loved ones with the money instantly falling out of your estate for IHT purposes.

Done properly, you could make this the best Christmas ever and spare loved ones a brutal 40 per cent tax charge in future. Better still, you can pass on your wealth while alive, which means you will be around to see the pleasure it gives to loved ones.

three generations of men in a family, young to oldCredit: fizkes

IHT planning is more important than ever, as HM Treasury is on course to take more than £7 billion this year, a record sum. That will climb as the threshold at which people start paying IHT has been frozen all the way to 2028, dragging more into the net every year. While the super-wealthy hire tax planners to reduce their IHT exposure, ordinary people struggle to understand the rules and pay a lot more than is necessary as a result.

"You can pass on your wealth while alive, so you can see the pleasure it gives to loved ones"

The good news is that there are legitimate ways to leave behind as much as possible to your relatives when the time comes. This checklist may help.

Use your gift allowances

Every year, you can give up to £3,000 away to whoever you like, with instant IHT exemption. If you didn’t use last year’s allowance, you can combine both allowances and pass on £6,000 in total. Couples could pass on £12,000 in total this Christmas.

"Couples could pass on £12,000 in total this Christmas"

You can also give up to £250 each year to any number of people, provided they haven’t benefited from the £3,000 exemption. This is limited to one gift per recipient. 

Wedding gifts

Father of the bride dancing with his daughterCredit: DGLimages

Anyone you know getting married? If they are, another option is to make a wedding gift, which falls out of your estate if you stick to these limits: £5,000 for a child, £2,500 for a grandchild and £1,000 for anyone else.

Make regular gifts

In a little-known rule, you can also make regular gifts from income, provided you can demonstrate your standard of living is not affected.

Make a potentially exempt transfer

The IHT rate steadily reduces on a sliding scale if you survive more than three years after making the gift.

Give to charity

Another option is to give money to charity. If you leave at least ten per cent of your net estate to a good cause, you may cut the IHT rate on the reminder to 40 per cent.

Use your pension

older woman signing papers with guidance from a younger womanCredit: monkeybusinessimages

Any unused pension is not subject to IHT on death. If you die before age 75 it can be passed on to beneficiaries free of tax, although loved ones may pay income tax on any withdrawals if you die after age 75.

If gifting to loved ones, use other sources of money first, as these may become liable to IHT.

Write a trust

Another option is to gift assets inside a trust, as they should fall outside your estate if you live for at least another seven years. This is complex and requires advice.

Spend it

Older couple arriving for Christmas with gifts for younger couple

Credit: monkeybusinessimages

The simplest way to avoid IHT is also the most enjoyable. You could simply spend your money. Take the family out. Have fun. It’s Christmas, after all.

Banner credit: Evgenyatamanenko

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