A reader from North London asks about options for reducing inheritance tax since her 80-year-old mother wants to transfer wealth to her children and grandchildren now, without the burden of a future tax bill. Given that the mother’s London home will fully utilize the inheritance tax allowance, she seeks alternatives to the seven-year rule for gifting without tax implications.

There are several strategies available, especially if her mother plans to give away a substantial amount. Utilizing various exemptions could allow for effective wealth transfer.

Initially, she can make use of several exemptions that permit thousands of pounds in gifts with minimal conditions. Although the amounts are capped, it’s advantageous for her to take full advantage of these allowances.

Her mother can gift up to £3,000 each tax year using the annual exemption. If this exemption wasn’t used in the previous tax year, it can be carried forward, allowing up to £6,000 in one tax year.

Additionally, she can provide gifts of up to £250 per recipient per tax year utilizing the small gift exemption, provided that the annual allowance hasn’t been used for that recipient.

Moreover, she can give tax-free gifts for the marriage or civil partnership of specific relatives, which includes £5,000 for a child or £2,500 for a grandchild.

If her mother has excess income, she might consider regular gifts from this surplus, as these would be immediately exempt from inheritance tax, with no cap on the amounts gifted each year.

However, maintaining records is crucial to comply with HMRC requirements. Completing form IHT403 annually and keeping it with her will is advisable.

As an alternative, investing in assets eligible for Business Property Relief may be beneficial. Certain investments, such as shares in the Alternative Investment Market, can become exempt from inheritance tax after being held for two years.

While this method carries risks due to the fluctuating value of such assets, obtaining professional financial advice is essential to evaluate those risks, especially considering recent budget changes that capped relief at £1 million.

The Seven-Year Rule

The seven-year rule, which involves potentially exempt transfers, applies to capital gifts. If her mother lives for seven years after making a gift, it generally becomes exempt from tax.

However, should she pass away within this timeframe, the recipient would be responsible for the tax liability, potentially inhibiting their ability to enjoy the assets received.

To protect against this scenario, updating her will so that executors can cover any tax due from her estate—assuming sufficient estate assets exist—can be prudent.

Another option might be to insure against the tax liability, although these tailored policies can be costly, they can effectively manage the associated risks.

While these exemptions can provide valuable strategies, their limitations often lead many to rely on the seven-year rule.

For substantial estates, consulting an estate planning solicitor and a financial adviser is highly recommended. Each situation is unique, and significant tax savings can be jeopardized by minor oversights.

Tim Snaith is a partner at Winckworth Sherwood, a London law firm, where he focuses on trusts, estates, and succession planning.