Inheritance tax: Legal way to pass on 'as much as you wish' without paying death levy outlined

Families could be allowed to gift large sums inheritance tax (IHT) free with a little-known tool, according to a financial expert.

Following the advice properly could see large sums being moved with little risk of HMRC getting involved, especially if better-known gifting options have been exhausted.

Every adult is able to gift £3,000-a-year IHT-free, meaning couples are able to gift £6,000 in total, while covering last year’s allowances too, if unused.

Brits are eligible to make smaller IHT-free gifts of up to £250 per person if the recipient has not benefited from the £3,000 allowance.

Parents are also able to gift £5,000 to a child who is getting married, or £2,500 to a grandchild or great-grandchild.

A £1,000 gift can also be provided to a relative or friend who is getting married.

Further gifts are known as “potentially exempt transfers” and are only fully free of IHT if you live for a further seven years after making them.

Tax and financial planning expert at Quilter, Rachael Griffin, said families who want to do more should consider making regular gifts from excess income.

HMRC could penalise any payments they see as having a negative impact on a person's standard of living
Paul Faith

She told the Daily Express: “The normal expenditure out of income exemption opens up more options, particularly for those who still work, or who have some excess income they do not need but want to save their beneficiaries.”

Griffin added there is no limit on the amount of excess income that can be gifted, saying: “Providing you have enough income left to meet your usual standard of living and spending needs, you can pass on as much as you wish within the exemption.”

The amount that can be gifted is largely dependent on your personal financial circumstances.

“To take an extreme example, a Premier League footballer could probably afford to gift £10,000 a month while still meeting the criteria,” she added.

“For most, the sums will be a lot smaller and depend on the standard of living you are looking to maintain.”

A parent or grandparent could potentially use this exemption when helping their child or grandchild with their rent, while reducing a future IHT bill.

The inheritance tax tool must be applied carefully
Dominic Lipinski

If they gave a lump sum or used another gifting allowance, the exemption would allow them to offer more support.

Griffin warned that this needs to be done carefully in order to avoid being penalised by HMRC.

Payments must be made from current income, which includes earned income, dividends, interest, rental income or pension income, as opposed to capital.

Income saved from previous years may be deemed as capital and therefore ineligible.

One-off sources of cash will not be deemed acceptable by HMRC and you must have enough income to live on.

Any negative impact on your standard of living after making the payment is also a determining factor in whether you will be allowed to take the action.

Gifts should also be consistent, with patterns scrutinised by HMRC over a reasonable period, normally at least three to four years.

However, they do not need to be the same amount on the same date.

As HMRC may ask for a record, one must be kept in order to show them.