TWM Solicitors, a leading private wealth and family law firm, has warned that the annual £3,000 allowance for inheritance tax-free gifts has lost 78% of its value since it was introduced in 1981. The allowance has remained unchanged despite cumulative inflation of 354%, meaning it would now be worth around £13,600 if it had kept pace with rising prices.
Stealth tax warning
Duncan Mitchell-Innes of TWM Solicitors said: “The tax-free gift allowance was designed to let people give meaningful gifts to their loved ones without leaving them facing a tax bill on death. Today, it is becoming increasingly insignificant. By freezing the allowance, what the Government is really doing is hiding a tax increase – a classic ‘stealth tax’.”
Purchasing power erosion
Mitchell-Innes highlighted how the allowance's purchasing power has diminished dramatically. In 1981, families could gift enough for a house deposit or even a brand-new Mini tax free. Today, the same allowance barely covers the cost of replacing an average boiler. The £3,000 in 1981 was worth around 16% of the average UK house price, compared with just 1% today. It also represented approximately five months' salary for the average UK male and almost eight months for the average UK female in 1981, compared to only a month today.
Administrative burden on families
Mitchell-Innes explained: “With the gift allowance threshold effectively falling every year, families need to trace and document increasingly smaller gifts. A £3,000 gift today is nothing like it was in 1981 – it could be as ordinary as a few months’ rent. This adds an administrative burden on families at an already difficult time. They already face heavy compliance when they lose a loved one and need to submit an IHT return. With much more pressing issues like valuing the property they inherit, a £3,000 gift can easily be missed and result in an HMRC penalty.”
In addition to the £3,000 annual allowance, gifts made within an individual’s lifetime are exempt from inheritance tax if that individual survives seven years after making the gift. Individuals can also make ‘gifts out of surplus income’.
