Can you gift your property or other possessions to reduce IHT?

The amount of inheritance tax (IHT) that families are paying is only heading north. Rising house and other asset prices, in combination with a nil rate band that hasn’t shifted since 2009, means increasing numbers of bereaved families are paying the much-loathed tax.

Currently it’s only around one in 20 estates that pay IHT but, by 2029, that’s expected to jump to one in 12, according to a report by Oxford Economics for think tank, Onward.

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It says that’s double the number of families that were paying IHT in 2009 and that if the nil rate band had risen in line with inflation, it would now stand at £538,000 (compared to the actual tax-free allowance of £325,000).

But, future increases won’t just be driven by house price growth and frozen tax thresholds. There’s also the thorny issue of the upcoming IHT reforms, which will see unspent pension funds become subject to IHT from 6 April 2027.

That means even more frustrated retirees will be looking to explore every opportunity to get wealth out of their estate and attempt to pass it on tax-free to the younger generation through lifetime gifting.

In particular, there could be a marked increase in gifting from those who will see their estates tip over the £2 million threshold, once pension wealth is taken into account. At this point the residence nil rate band (RNRB) – which allows a married couple to pass on a further £350,000 tax-free when they leave the family home to direct descendants - is gradually tapered away.

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Can I give away my possessions to cut my IHT bill?

When we think about lifetime gifting, we normally think about cash gifts or payments into trusts.

If you’re wary of giving away money, or much of your wealth is tied up elsewhere, it is also possible to make non-cash gifts to mitigate a tax bill. That could be anything from your home or other property to jewellery, art, antiques and other valuable possessions, which will be included in estate calculations when you die.

But non-cash gifts are far from straightforward and if it’s something you’re considering it’s important to understand the rules or risk a surprise tax bill.

What you need to know about non-cash gifts

Remember capitals gains tax first

As a starting point, it’s important to understand that if you give away an asset to a child or family member who isn’t your spouse or civil partner, capital gains tax (CGT) may be payable.

The tax is payable when you sell – or “dispose” – of an asset and your gain exceeds the annual allowance of £3,000. It’s charged at either 18% or 24% depending on whether you are a basic or higher-rate taxpayer.

But assuming CGT rates remain at their current level – and aren’t equalised with income tax – the bill would be less painful than IHT.

CGT doesn’t apply to your main residence, but would be payable on second properties like holiday homes or buy-to-lets. The tax is also payable on valuable personal possessions that would sell for £6,000 or more.

Furthermore, if the recipient then sells the gift at a later date, they might have to pay CGT too, if it had risen in value since they took ownership.

Understanding IHT gifting rules

If you make a gift that isn’t covered by annual or regular gifting allowances, it will be regarded as a potentially exempt transfer (PET), which means it will only be wholly tax-free if you survive seven years after the making the gift.

Taper relief may be available if you die between years three and seven, if the total value of your lifetime gifts exceeds the nil rate band.

But when you give away a non-cash gift, there’s another less well-known tax rule that can catch families out.

So-called gift with reservation of benefit rules (GWROB) mean that if you give away something for IHT purposes you must not get any further benefit from it.

For example, if you gave your home to your children, you’d need to find somewhere else to live. The only way you could stay there would be to pay your children a full market rent. This would apply for as long as they lived there, not just in the seven-year period.

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According to TWM Solicitors, it’s a common IHT trap. A freedom of information request the firm submitted revealed that over a 12-month period, HMRC conducted 461 investigations into estates it suspected breached the GWROB rules, resulting in gifts worth £156 million becoming unexpectedly taxable.

If HMRC believes you haven’t fully given your possession or asset away, it will fall back into your estate and be taxed accordingly.

And it’s not just giving away homes that causes a problem. You could also breach rules by giving away valuable jewellery, antiques, art or shares in a business, if you continue to benefit from them in some way.

Problems between families and HMRC can arise around what exactly constitutes a “benefit”.

While some breaches will be obvious – you can’t give away a piece of art or antique furniture, for example, and continue to display it in your home – others may be less clear cut.

For example, getting no further benefit from a property you have given away could go beyond moving out.

For example, HMRC tax manuals suggest that simply continuing to store books in a library, and regularly returning to use them, could breach the rules. By that logic, storing possessions in the loft or garage because they don’t fit in a new, smaller home, might also be problematic.

If you gave away a holiday home, you wouldn’t be able to use it for the odd holiday or weekend away either.

And while you might give away a luxury car, you can’t then rely on your child to provide a daily chauffeur service.

There could be scope for confusion if you gave away shares in a business too – if you retained any perks, like dividends or voting rights, that would be considered a GWROB as well.

In addition to not getting any benefit from a gift, you’ll also have to surrender responsibility for the asset to the recipient as well.

On a practical level that means you can’t continue to pay for insurance, for example, on a car, piece of artwork or jewellery that you have given away.

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What will raise a red flag with HMRC?

To spot tax avoidance, HMRC uses an AI-powered system to bring together huge amounts of data. This includes internal data from individual’s personal tax records as well as external sources.

This could be anything from bank, savings and investment records to credit and debit card transactions, DVLA records as well as online accounts like eBay or Airbnb. It can even see your social media.

With so much data to hand, it is then able to flag inconsistencies between what has been declared to HMRC previously and what is stated in IHT paperwork. Or it might show that you’re still paying for insurance on items that you have gifted, or continuing to use a holiday home you no longer own.

HMRC also actively encourages people to report individuals they suspect are breaking the rules.

Don’t leave it to chance

It doesn’t matter whether you are gifting cash, other assets or even personal valuables, if you’re wanting to mitigate tax, it’s sensible to talk to a financial planner.

In addition to helping you plan your estate as effectively as possible, they will also make sure you understand what’s required to fully get your wealth outside of your estate – without facing any challenges from the taxman, or an unexpected tax bill.