The most recent figures show that taxpayers saved £30m in inheritance tax (IHT) through gifting last year with many taking advantage of the £3,000 annual gift allowance
But there is criticism that the annual gift allowance that allows taxpayers to gift £3,000 each year without incurring inheritance tax should be around £11,760 had it been increased in line with inflation.
The £3,000 allowance, which was introduced in the 1980s has been frozen for nearly 40 years, said accountancy firm UHY Hacker Young.
Taxpayers can also use the small gifts exemption which allows individuals to make unlimited gifts of £250 each year but this has also been unchanged and if it had increased with inflation then it would be closer to £1,096. This has to be given to different individuals and cannot be accrued, for example with monthly payments to the same beneficiary.
Hacker Young stated that gifting by taxpayers last year consisted of £25m through the £3,000 annual IHT exemption and £5m through the small gift exemption and the amount saved in IHT through gifting only accounts for 0.6% of the £5.3bn which HMRC brought in through IHT last year.
Neela Chauhan, partner at UHY Hacker Young said: ‘It is a useful way to cut IHT but it should be a much bigger allowance. For the gift allowance to remain unchanged for 40 years is extraordinary. Taxpayers now get a far worse deal than they did when it was first introduced.
‘Back in 1981, you could buy a brand new car with a £3,000 gift. Today, it wouldn’t even come close. It’s clear an increase in the tax relief on gifts is long overdue. That’s something the government ought to look closely at.’
When the tax was first introduced it was intended to affect only the very wealthy, but the rise in the value of homes, particularly in the south-east of England, has brought more families into the net in recent decades. Gifting is a legitimate way for families to reduce an inheritance tax bill.
Chauhan adds ‘Although it may be seen as a relatively small allowance, more individuals should be taking advantage of this tax break. It’s a perfectly legitimate way of passing on wealth to a loved one without incurring IHT.’
IHT receipts received by HMRC during the tax year 2020-21 totalled £5.4bn which was an increase of 4% or £190m from the tax year 2019-20. The tax haul is expected to reach an all-time high of £6bn next year according to the Office of Budget Responsibility.
