Are you aware of the inheritance tax risks associated with gifting?

According to new research conducted by the National Centre for Social Research (NatCen) and the Institute for Fiscal Studies (IFS), only one in four people who make financial gifts are aware of the inheritance tax (IHT) risks.

The research found that many were unaware of the gifting rules, liability for IHT and the risks associated with making financial gifts without considering the tax rules.

Currently, gifts are exempt from IHT if it meets the following criteria; the value is less than £250 individually, the gift totals less than £3,000 per year, or helps with certain people’s living costs.

However, if the donor dies within seven years of making the gift, this is classed as a potentially exempt transfer (PET).

A failed PET is taxed on a sliding scale known as ‘taper relief’. This means if the gift was given less than three years before death, a full tax charge of 40 per cent will incur on the gift, reducing to eight per cent if the gift is given six to seven years before death.

The current starting threshold for IHT for a single person is £325,000 and £650,000 for married couples and civil partners. Couples also have the added benefit of the residential nil-rate band which gives them an additional £150,000 each of tax-free property-based inheritance as of 6 April 2019.

The NatCen and IFS report indicated that only 25 per cent of gifters were described as having a ‘working knowledge’ of IHT rules, while fewer than half (45 per cent) of gifters reported being aware of IHT rules or exemptions when they gave their largest gift.

Despite knowing about the tax liability, most respondents did not equate gifting with IHT and said it did not affect their gifting behaviour.

Moreover, only eight per cent of all gifters considered the tax rules before making a financial gift.