Inheritance tax-free gifts: ‘Best policy’ to make financial gifts from surplus income | Personal Finance | Finance

“We say ‘up to’ because if the gifts put together exceeded the nil rate band then taper relief can apply, which reduces the tax paid on older gifts. If there were three-to-four years between the date of gift and death, the IHT rate lowers to 32 percent, while at six-to-seven years the rate falls to just eight percent.”

All of this means that large gifts exceeding the nil rate band (£325,000) can moderate IHT liability even if they fall foul of the seven-year rule.

However, Mr Dyall continued: “If a gift does become liable for IHT, it is the recipient who will have to pay, and they may not have the resources to meet a surprise tax bill when it arrives, possibly having spent the money.

“A corollary of all this is, that if someone makes a gift of a value below the nil-rate band to one person, and then dies within seven years, then all the beneficiaries of the estate could share the liability on the lifetime gift received by one person.”

However, there can be a way to gift amounts of any value, tax-free, and avoid being hit with a hefty IHT bill, Evelyn Partners experts have said. This can be done from surplus income, and the donor must be able to prove their standard of living has not been adversely affected by the gift.

Mr Dyall said: “Surplus income is what remains after all of your outgoings have been paid: funds left over which are surplus to needs and have no bearing on your standard of living. Your income includes earnings from employment and pensions, but it can also include interest, dividends and rental income. But some regular payments which savers might think of as ‘income’ are not counted.”

How to make regular, tax-free financial gifts

According to Mr Dyall, it can be as simple as setting up a regular standing order directly into the recipient’s bank account. Alternatively, they could set up some sort of policy for the recipient, such as a life insurance or pension plan, to pay the regular premiums out of their surplus income.

Parents or grandparents can pay into a Junior Individual Savings Account (JISA), an early-years pension, or a trust, to house accumulated regular gifts for their loved ones.