Making financial gifts to loved ones? Write it down or risk giving an IHT bill too

Generous Brits are unknowingly leaving their loved ones open to inheritance tax bills by failing to document how much they have given and to whom, according to latest research.

Nearly half (45%) of wealthy individuals have no written record of what they’ve gifted to loved ones, according to new research from Charles Stanley, a wealth manager. This gives rise to potential problems later on.

Making financial gifts is a popular way to pass wealth onto loved ones and avoid inheritance tax (IHT) on estates.

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But without detailed written records of what has been gifted this could leave loved ones with potentially costly and unexpected inheritance tax bills.

Almost one in three (29%) of those surveyed said they are relying on keeping mental notes on what they’ve gifted or plan to. Meanwhile 17% simply have no record of what they’ve gifted in their lifetime.

Harry Bell, director of financial planning at Charles Stanley, said: “Making gifts by the book is what really matters. While many claim to keep a record of what gifts have been made, it’s only those with written records that HMRC can track.”

How much are wealthy Brits gifting?

Of those who have made financial gifts in the last year, they averaged £8,367. However, this far exceeds what individuals can give away under the current gifting rules of up to £3,000 each tax year.

Looking across generations, Baby Boomers (aged 61-79) say they have gifted an average of £11,756 in the last year, while Generation X (aged 45-60) have gifted an average of £6,795.

While generous, this means that if individuals were to pass away within seven years of making these gifts, beneficiaries could be subject to paying inheritance tax on what they were gifted.

How does gifting work?

Just under half (48%) of those asked in the Charles Stanley survey say they have a written list of exactly what they’ve gifted or plan to. Ideally you should keep the following records:

• what you gave and who you gave it to
• the value of the gift
• when you gave it

This will make the job simpler for any executors of your estate, who will be responsible for reporting any financial gifts through the IHT400 form, particularly those made in the seven years prior to death – following the seven year inheritance tax rule – and working out if any inheritance tax is due.

It is important to remember that any inheritance tax due on gifts is usually paid by the estate – unless you give away more than £325,000 in gifts in the seven years before your death.

Once you’ve given away more than £325,000, anyone who gets a gift from you in those seven years before you die will have to personally pay inheritance tax on their gift.

HMRC gives the example of Sally, who died on 1 July 2022. She was not married or in a civil partnership when she died. She gave three gifts in the nine years before her death:

• £50,000 to her brother nine years before her death
• £325,000 to her sister four years and two months before her death
• £100,000 to her friend three years before her death

There’s no inheritance tax to pay on the £50,000 gift to her brother as it was given more than seven years before she died.

There’s also no inheritance tax to pay on the £325,000 she gave her sister, as this is within the inheritance tax-free threshold.

But her friend must pay inheritance tax on her £100,000 gift at a rate of 32%, as it’s above the tax-free threshold and was given three years before Sally died. The inheritance tax due is £32,000.

Bell said “Making financial gifts is one of the best ways to offset inheritance tax, and is seeing a growth in popularity as a way to transfer wealth from generation to generation.

“With IHT thresholds also remaining frozen and private pensions set to be included in estate valuation from 2027, gifting will only become more popular as a tool for families to pass their wealth on.

“However our research shows that there is a concerning lack of understanding around gifting and the potential unintended consequences if not done appropriately.”