As a result, some savers have been giving money to their families during their lifetime to reduce the value of their estate.
But this needs to be done carefully if you want to lower your inheritance tax bill. Experts usually advise against giving money away at the last minute, as gifts made in a person’s final seven years use up some of their £325,000 nil-rate band. For example, a £100,000 gift would leave someone with a tax-free allowance of £225,000.
However, in certain circumstances, making a last-minute gift could still save a family thousands of pounds in inheritance tax – even on your deathbed.
How last-minute gifts could cut your bill
While a last-minute gift won’t reduce the size of your estate, it can still be very valuable for those with estates larger than £2m because of the way it interacts with the residence nil-rate band.
In addition to the £325,000 nil-rate band, homeowners leaving their main property to their children can claim an extra £175,000 allowance. This is called the residence nil-rate band.
Large estates lose this extra allowance at a rate of £1 for every £2 over the £2m threshold. The allowance disappears completely at £2.35m for a single person and £2.7m for a couple.
This means a £2.1m estate would miss out on £50,000 of residence nil-rate band to use against their property. For a single person, this would mean an inheritance tax bill of £660,000, assuming the full nil-rate band and remaining residence nil-rate band had been used.
But if that person were to give away £100,000 to their family – even if the gift was last minute – their residence nil-rate band would be reinstated in full, and could significantly reduce their inheritance tax bill. This is because while the nil-rate band is subject to the seven-year rule, the residence nil-rate band is not.
According to calculations by accountancy firm Alexander & Co, giving away £100,000 could save a £2.1m estate £20,000 in inheritance tax.
While a last-minute gift of £100,000 would reduce their nil-rate band to £225,000, they would retain their residence nil-rate band in full, based on a £2m estate, leading to a tax bill of £640,000.
Mr Morrow-McDade said: “This is a true ‘loophole’ in the legislation which hasn’t been patched by Parliament.”
Sean McCann, of insurer NFU Mutual, said a growing number of clients were being pushed over the £2m threshold by the pension changes.
“Making gifts can be an effective way to reduce your estate below £2m,” he said. “While most gifts made in the seven years before death are caught in your wider inheritance tax calculation, they are not included when assessing your right to the extra tax-free allowance on your home, making deathbed gifts an option.”
