Following an in depth study conducted by the National Centre for Social Research (NCSR) and the Institute for Fiscal Studies (IFS), it has been discovered that only one in four people making financial gifts are aware of the risks of inheritance tax. Further to this, they found that only 45% of gifters reported being aware of inheritance tax rules and exemptions when they gave their largest gift.

A staggeringly low 8% of respondents considered tax rules before making a financial gift and most did not associate gifting with inheritance tax. When compared with the fact that over half of respondents said that they planned to leave inheritance, it’s obvious that there seems to be a gap in gifter’s knowledge.

For those who were aware of the rules surrounding inheritance tax, 54% said this influenced the value of their largest gift. This was most prevalent amongst affluent taxpayers who had assets of £500,000 or more. Respondents below this threshold had more limited knowledge of the long-term effects of inheritance tax, the seven-year rule or the annual limit on gifts.

So, where does the money go?

80% of gifters gave to individuals, with charities coming in second at around 10%. The most common beneficiaries were adult children, followed by 15% giving to parents or other family members and 14% making gifts to friends. The most popular reasons were presents for birthdays and weddings.

The data also suggested that even when individuals considered inheritance tax rulings, it did not deter them from giving the gift.

The rules

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year – but only for one year.

For smaller gifts, you can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.

The current starting threshold for inheritance tax for a single person is set at £325,000. This amount is then doubled for married couples and civil partners, who also have the additional benefit of the residential nil-rate band, which allows for a further £150,000 of tax-free, property-based inheritance per person. This particular allowance is set to rise to £175,000 as of the 6th of April 2020.

An unsuccessful PET is taxed depending on how long the gifter has lived following the giving of the gift and is referred to as ‘taper relief.’ If a gift is given less than three years before death, the full rate of 40% is applied to the gift, tapering off to 8% if the gift was given between six to seven years before death.

However, this is not the case when it comes to transactions with a reservation of benefit. For example, if you give away your home to your children and continue to occupy it rent-free, the property is still considered as forming part of your estate immediately if the worst were to happen. An individual cannot retain possession of a chattel or property whilst making a PET.

Though it may be difficult to plan for the worst, knowing how to best mitigate the tax surrounding gifts and inheritance can help you make key financial decisions at the most opportune moments, and prevent any avoidable losses when it comes to sharing your assets with the people and organisations that matter most to you.

The Financial Conduct Authority does not regulate tax advice