How your inheritance tax bill could be reduced by giving money this Christmas

Giving cash as a Christmas gift is simple and quick, and it may shield some of your estate from future taxes

Giving cash to a loved one for Christmas isn't the most creative gift idea, but it can be perfect if you're short on ideas and time. Your inheritance tax liability may also be lowered.

According to the most recent data from HMRC, inheritance tax receipts increased by 84 million annually and continued to rise, reaching 5.8 billion in the first eight months of the current tax year.

Giving money to friends and family during this holiday season, however, could benefit them both by increasing their bank account balance and lowering the value of your estate for inheritance tax purposes.

A standard 40 percent tax rate (on any amount over the 325,000 nil-rate band) may be applied to a smaller portion of your estate if you reduce its value.

Remember, it's also important to keep track of any gifts you've given so the executor of your will can more easily declare them to HMRC after your passing.

This holiday season, Sarah Coles, head of personal finance at Hargreaves Lansdown, offered five strategies for using inheritance tax gifting regulations to reduce the value of your estate.

Make the most of the yearly gift limit.

Through the annual gift allowance, you can donate up to £3,000 each tax year without it becoming part of your estate.

You could give 1,500 to one relative and 1,500 to another, for instance, and still be within the allowance because it can be divided among several people.

It is also possible to carry over the yearly allowance to the following year.

"You can carry over your 3,000 allowance and give 6,000 if you didn't use any of it in the prior tax year," Coles stated.

Utilize the little gift allowance.

Additionally, as long as you haven't given the same person money through the annual exemption, you may give up to 250 gifts per person each tax year.

The small gift allowance is the term for this.

Give a wedding gift.

If it's a gift for a civil partnership or wedding, you can give more money while staying within inheritance tax regulations.

"You can give 5,000 to a child as a wedding gift, 2,500 to a grandchild or great-grandchild, and 1,000 to anybody else," Coles stated. A "

With the exception of the small gift allowance, wedding gift allowances can also be combined with other allowances.

Using your "surplus income" to give gifts.

The "normal expenditure out of income" exemption allows you to give money if it is a portion of your "surplus income."

This enables you to give up to £3,000 annually (the current annual gift allowance) without having to pay inheritance tax later on.

To be eligible for the exemption, you must fulfill three requirements. These are as follows.

The gifts must be included in regular spending; a distinct, consistent gift-giving pattern must be established. Once a year, Christmas can be a good time to give these gifts. The gift must come from "normal" income, and you must be able to maintain a normal standard of living after making it (and avoid taking money out of investments or savings to pay for it). Pension, rental, and dividend income are all included. Coles stated: "You don't have to give the person the gift directly. For kids, you can contribute to a Junior ISA that they can access upon turning eighteen. The "

If you're thinking about this exemption, it might be worthwhile to consult a financial advisor or tax professional because the regulations can be intricate and technical.

Transfers that may be exempt (PETs).

The "seven year rule" allows you to give larger amounts of money that are free from inheritance tax. Potentially Exempt Transfers (PETs) are gifts given during this seven-year period.

"Christmas might be a good time to make these gifts," Coles said. In addition to being a very generous Christmas present, it's a good opportunity for the family to talk about any problems that may arise. The "

According to the regulations, gifts are exempt from inheritance tax as long as you don't pass away within seven years of giving them.

A sliding scale known as "taper relief" is used to pay the inheritance tax due if you do pass away within seven years. Depending on when you passed away, the estate is subject to varying rates of taxation.

For instance, gifts made within three years of your passing are subject to a 40 percent tax, whereas gifts made between three and seven years prior to your passing are subject to a 32 percent or 0 percent tax.

In another article, we define trusts and discuss how they can be utilized to reduce inheritance tax.