When he dies, Jeremy Stern believes his family could face an inheritance tax (IHT) bill exceeding £1m.
The 65-year-old Londoner, who still works four days a week in marketing, is married and has six children – three of his own and three stepchildren.
To spare them not only a substantial tax burden but also additional stress during an already difficult time, he has been gradually gifting away his wealth in an effort to reduce the amount liable for what is often described as Britain’s most unpopular tax.
Giving gifts during your lifetime is one of the simplest ways to bring down the value of your estate so it falls within the tax-free allowances.
So far, Jeremy has passed more than £500,000 onto his children with guidance from a financial adviser.
Speaking to The i Paper, he said: “I have helped all of my kids get on the property ladder. In fact, I now own and rent out a flat in Brighton that my daughter lived in whilst at university.
“But I have always tried to make them get what they wanted first, themselves, and I only helped out with that final bit that might have been just out of reach.
“Gifting should not stop them from striving. But when one of them gets divorced or is a single mum living in Australia, helping becomes natural. I would not feel good enjoying myself, whilst my kids were sweating about grocery bills or rent.”
The same applies to charitable gifting, he said, which was instilled in him by his parents. He has over a dozen monthly subscriptions to charities and gives on an ad hoc basis to many more.
What are the rules on gifting money to your children?
If on death your estate is worth more than the £325,000 tax-free allowance – the nil-rate band – anything above this threshold will be subject to IHT, charged at 40 per cent.
If your home is included in your estate and a direct descendant inherits it, your tax-free allowance will be £500,000 because of the £175,000 residence nil-rate band.
Married couples can get a combined allowance of up to £1m but if your estate exceeds this, there could be tax to pay. The £175,000 extra allowance for your home only applies if the estate is worth less than £2m. On estates worth more than this, the allowance will decrease by £1 for every £2 above £2m that the estate is worth.
There are several ways you can give tax-free, including:
- Annual gift allowance – a £3,000 annual IHT exemption for gifts to use during your lifetime. Sums up to this cap will not be included when IHT is calculated. You can carry forward any unused allowance and there is also a £250 small gifts allowance per tax year.
- Wedding or civil partnership gifts – you can give up to £5,000 to a child or £2,500 to a grandchild for a wedding each tax year. This can be combined with the standard £3,000 annual allowance if it is all for the same person, but you can’t combine it with the small gifts allowance.
- Seven-year rule – gifts of any value made seven years or more before death will not be considered part of your estate and will be in no danger of IHT.
- Gifting out of surplus income – this allows any taxpayer to give away unlimited sums of money without getting caught by IHT. If you have income left after covering your usual living expenses, you can gift this to family or friends without it counting towards your estate for IHT purposes.
- Trusts – setting up a trust allows you to give away money without relinquishing all control. Money put into a trust falls out of your estate for IHT after seven years. But a 20 per cent tax charge may apply when setting up a trust with money that exceeds the IHT nil-rate band – £325,000 per person.
Jeremy, who lives in a four-bed house with no mortgage costs, takes a blended approach when deciding how much to gift each child. They get equal amounts initially but then additional top-ups for specific needs.
He added: “We give a base level each year equally and then top it up based on individual circumstances, for example, if one is pregnant and their income has dropped, or another is moving house.
“But these variations are recorded, and in the final reckoning, via our will, they will be factored into the final distribution, post our deaths, so that they will all then [have received] equal amounts.”
He hasn’t gifted directly to his wife, he said, but he has funded her pension.
Despite the large amount of gifting he has done, he has managed to build a large private pension worth £750,000 that will “sustain” him in later life. He said it is spread across several investments to spread the risk and maximise the gain.
But he is “very disappointed” about the move to include unused pensions in the IHT net from April 2027.
Jeremy said: “IHT is bad enough. We were taxed on it initially and then if we haven’t actually spent it on death, we are taxed again.
“Income tax is 40 per cent for high taxpayers, so if you earn £100,000 – which is above the threshold – you might only keep £60,000 of it.
“Assuming you saved all of it – above the £325,000 threshold – and then died, there would be a further tax of 40 per cent on those savings.”
Jeremy said he will continue gifting and working, but plans to halve his hours next year and perhaps take a non-executive role in his company from 2028.