Gifting can be a key strategy when you are looking to reduce your estates potential inheritance tax bill. Many people consider gifting when they have been left a legacy by a family member or other acquaintance, and they consider they do not really need the money. One potential way to ensure you never have to pay inheritance tax in this scenario is to revoke or divert the gift so it never comes to you. This can be done within two years of the deceased death via a deed of variation.

An effect way of protecting all parties when gifting money is to take out a decreasing term insurance gift inter vivos policy to protect the “Gift Inter Vivos“.  This is a special type of insurance policy when the sum insured decrease as the inheritance tax liability decreases over the seven year period.

Another way that people attempt to eliminate Inheritance Tax liability is by simply decreasing the size of their estate before they’ve died. They usually go about this by making gifts to family members and grandchildren – these will remain tax-exempt as long as the giver lives for seven years after the gift was given.

Of course, there is always the risk that the donor may die within the seven-year period, so the donor will often take out a life insurance policy to cover the cost of the tax payable, should they die within that period. This type of insurance is technically known as a gifts inter vivos insurance policy and it will run for seven years. The policy is set up in trust to ensure that the funds fall outside the donor’s estate for tax purposes. The beneficiaries are normally the heirs to the estate.

Any amount of money given away outright to an individual is not counted for tax if the person making the gift survives for seven years. These gifts are called ‘potentially exempt transfers’ and are useful for tax planning.

Some cash gifts are exempt from tax regardless of the seven-year rule. They include: wedding gifts of up to £5,000 to each of your children; wedding gifts of £2,500 to each grandchild, and wedding gifts of £1,000 to anyone else; other gifts of up to £3,000 a year (plus any unused balance of £3,000 from the previous tax year); gifts of up to £250 each to any number of people each year; gifts to charities, the National Trust, national museums, the main political parties and most registered housing associations.