Guide to Recording Cash Gifts: Reduce Inheritance Tax & Spare Your Loved Ones the Red Tape

Maintaining a meticulous record of cash gifts given during one’s lifetime can ease the administrative load for executors and potentially reduce those inheritance tax bills, a guide in The Telegraph explains.

Inheritance Tax’s Expanding Reach

The UK government has set the inheritance tax-free allowance, also known as the nil-rate band, at £325,000. This threshold will remain unchanged until 2028. Predictions from the Office for Budget Responsibility indicate that, due to this static limit, almost 47,000 estates will be liable for inheritance tax each year by that date – that’s nearly double today’s numbers!

Originally intended to target the ultra-wealthy, inheritance tax is now a looming concern for Britain’s homeowners and middle classes. Calls have emerged, including campaigns by publications like The Telegraph, for the scrapping of this ‘death duty,’ especially since bereaved families are currently paying an unprecedented £7.1 billion annually.

However, it’s not just about the money. Many underestimate the administrative maze that awaits families when a loved one passes on.

Executor’s Role in Reporting Gifts

The executor, a person you assign in your will, takes charge after your demise. Their tasks involve collating and presenting data about your estate. Crucially, if your estate owes inheritance tax, the executor must complete the IHT400 form and potentially other paperwork, providing HMRC with a comprehensive view of your assets and gifts.

In the past, nearly half of all estates required the completion of an IHT form. Thanks to a 2022 rule change prompted by the Office of Tax Simplification, only estates exceeding the inheritance tax thresholds or those with specific circumstances need to undergo this process.

The Importance of Recording Gifts

There are gifts your executor doesn’t need to report:

  • Small gifts up to £250 for each recipient yearly.
  • Annual gifts under £3,000.
  • Wedding or civil partnership gifts under set thresholds: £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else.

However, for larger gifts made within seven years of your passing, inheritance tax could be levied. Some gifts within this period might be entirely exempt, while others might benefit from reduced tax rates.

If you’ve gifted someone a property but continue to live there without paying rent, HMRC might still deem this as taxable, barring certain exceptions.

Navigating Complex Cases: Trusts & Extended Records

Trust-related gifts complicate matters. Typically, a seven-year rule applies to gift records. But, when a trust is involved, this doubles to 14 years, primarily because gifts into trusts are viewed as “chargeable lifetime transfers.” To simplify the process for your heirs, especially if trusts are involved, keeping a detailed record of gifts spanning back 14 years is a wise move.

Documenting Income-related Gifts

Certain regular payments, like those that come from your income and don’t impact your standard of living, are exempt from inheritance tax. But proving these gifts often requires a higher documentation standard. Hence, it’s recommended to maintain clear records, detailing not just the gifts, but also your annual income and expenses.

Conclusion

Inheritance tax can be daunting, but clear record-keeping can shield your loved ones from unnecessary burdens and potential financial pitfalls. Ensure you document your gifts, be aware of tax rules and exemptions, and consult financial experts if you’re unsure. Taking these steps can offer peace of mind that your family will be taken care of when you’re no longer around.