Giving money to loved ones? Put it in writing or run the risk of also giving them an IHT bill

Giving gifts can help you transfer wealth and lower your estate's inheritance tax liability, but if you do it incorrectly, you might leave your loved ones with more than they anticipated

According to recent research, giving Britons are unintentionally leaving their loved ones vulnerable to inheritance tax bills by neglecting to record the amount and recipient of their gifts.

According to a recent study by wealth manager Charles Stanley, nearly half (45%) of wealthy people do not have a written record of the gifts they have given to loved ones. This raises the possibility of future issues.

One common method of transferring wealth to loved ones and avoiding inheritance tax (IHT) on estates is through financial gifts.

However, in the absence of thorough written documentation of the gifts, this could result in unexpected and expensive inheritance tax bills for family members.

Of those surveyed, nearly one in three (29%) said they rely on making mental notes about what they have given or intend to give. In the meantime, 17% of people merely don't have any documentation of their lifetime gifts.

Charles Stanley's director of financial planning, Harry Bell, stated: "What matters most is making gifts by the book. HMRC can only track those who have written records, despite the fact that many people claim to keep track of all gifts. The "

How much do rich British people give as gifts?

The average number of financial gifts made in the past year was 8,367. This, however, is far more than the maximum amount of £3,000 that people are allowed to give away each tax year under the current gifting regulations.

When comparing generations, Baby Boomers (those between the ages of 61 and 79) report giving an average of 11,756 gifts in the past year, whereas Generation X (those between the ages of 45 and 60) report giving an average of 6,795.

Despite their generosity, this implies that beneficiaries may have to pay inheritance tax on the gifts if the donors died within seven years of giving them.

How is gift-giving done?

In the Charles Stanley survey, slightly less than half (48%) of respondents claim to have a written list of everything they have given or intend to give. The following documents should ideally be retained.

This will simplify the task for any executors of your estate, who will be in charge of reporting any financial gifts through the IHT400 form, especially those made in the seven years prior to death in accordance with the seven-year inheritance tax rule, and determining whether any inheritance tax is due.

It's crucial to keep in mind that, unless you give away more than £325,000 in gifts within the seven years prior to your passing, the estate is typically responsible for paying any inheritance tax owed on gifts.

Anyone who receives a gift from you during the seven years prior to your death will be required to pay inheritance tax on the gift if you have donated more than £325,000.

HMRC uses Sally as an example; she passed away on July 1, 2022. At the time of her passing, she was neither married nor in a civil partnership. In the nine years prior to her passing, she made three gifts.

50,000 to her brother nine years prior to her passing; 325,000 to her sister four years and two months prior to her passing; and 100,000 to her friend three years prior to her passing. Since the 50,000 gift to her brother was given more than seven years prior to her passing, there is no inheritance tax to be paid.

The £325,000 she gave her sister is also exempt from inheritance tax since it falls below the threshold.

However, because her gift of £100,000 was given three years prior to Sally's death and exceeded the tax-free threshold, her friend is required to pay inheritance tax at a rate of 32%. 32,000 is the inheritance tax that is owed.

Bell stated, "Transferring wealth from generation to generation through financial gifts is becoming more and more popular and is one of the best ways to offset inheritance tax."

"Gifting will only grow in popularity as a means for families to transfer their wealth, as IHT thresholds are still frozen and private pensions are scheduled to be included in estate valuation starting in 2027.

However, our research reveals a worrying lack of knowledge about gifting and the possible unintended consequences if done improperly. A "