The UK is in the midst of a historic shift in wealth. If the current predictions come to pass, around £5.5 trillion will be passed down to the next generation by 2050. With this unprecedented transfer of wealth, the government will acquire record receipts of Inheritance Tax (IHT).

IHT is effectively a death duty levied on the total value (less any liabilities, exemptions, and reliefs) of an estate at the time of death. IHT is usually paid at a rate of 40% on the value of an estate above a threshold of £325,000 - which is frozen up to 2030.

Given that this threshold has not changed since 2009, it is no surprise that people are looking to explore ways of passing on their wealth in a tax-efficient way. However, giving away your wealth is not always straightforward and there is no one-size-fits-all plan.

What are the usual exemptions and reliefs from IHT?

One in four wills prepared by a lawyer now contains some form of charitable giving and this is a trend which appears to be increasingly important to people planning the management of their estates.

In most cases, assets left to the spouse or civil partner of the deceased will typically be exempt from IHT – as will any assets left to a charity. Any unused threshold can be transferred to a surviving spouse or civil partner, increasing their combined threshold to up to £650,000.

There is an additional maximum transferable main residence nil rate band of £175,000 each, available when a home is left to the deceased’s children or direct descendants. Where the conditions are satisfied, this increases an individual’s estate threshold, before IHT becomes due, to £500,000 and for couples to £1,000,000 - also frozen until 2030.

With regard to charitable legacies, there is an additional benefit if 10% or more of the net value of the estate is left to charity. In those circumstances, the rate of IHT is reduced to 36% for the whole estate.

It is therefore imperative to obtain legal advice and work closely with the charity, or a philanthropic adviser, to ensure that your gift does not fail, that the legacy you intended can be achieved and that you support the charity in a manner which will ensure the greatest benefit.

What about giving assets and wealth away during your lifetime?

Gifts can include money but also ‘chattels’ (tangible personal possessions), such as jewellery or antiques, as well as encompassing property and other investments including shares. There is no IHT payable on gifts between spouses or civil partners.

You can also give away up to £3,000 worth of gifts each tax year without them being added to the value of your estate for Inheritance Tax purposes. Certain amounts can be given away free from tax, such as regular gifts from surplus income, for example for birthdays and Christmas, or regular lump sums, as well as wedding gifts. In addition, you can give as many gifts of up to £250 per person each tax year, provided you have not used another allowance on the same person.

What is the seven-year rule?

If you make a gift and survive for another seven years, there will be no Inheritance Tax to pay on that gift. If, however, you die within seven years of giving a gift, it will potentially become taxable because it is deemed to remain in your estate for IHT purposes. The tax may be tapered in respect of the amount above £325,000 gifted and paid at less than 40%, if it was given more than three years before your death.

We always advise clients to be aware of retaining benefits. If you give away an asset but reserve the benefit, the seven-year period will not apply unless and until you give up the benefit and the full value at the date of your death will remain in your estate for tax purposes.

Not all gifts are equal

When making successive gifts to people with the intention of gifting equally, you should be aware that the gifts may not all be treated the same in terms of tax.

The first gifts within the seven-year period before death will benefit from the deceased’s Nil Rate Band currently £325,000. Subsequent gifts within this period will be subject to IHT.

Make sure your gift is valid

As well as tax efficiency, you should also be mindful to ensure the gift is legally valid to ensure that disputes are unlikely to arise concerning whether a gift has taken place or whether a donor had capacity to give the gift.

Preparing to give away a lifetime’s assets to loved ones can carry significant emotions, so taking advice from legal and financial professionals and ensuring your intentions are clear and well-documented is essential.