The annual £3,000 allowance enabling individuals to gift money free of inheritance tax has effectively plummeted in value by 78% since its introduction in 1981, a private wealth law firm has warned.
TWM Solicitors, a respected family and private wealth law practice, points out that this limit has remained unchanged despite a cumulative inflation rate of 354%. Adjusted for inflation, the current allowance would be approximately £13,600 today.
Duncan Mitchell-Innes of TWM Solicitors explains: “The tax-free gifting allowance was originally intended to allow people to pass on meaningful sums to loved ones without incurring inheritance tax liabilities upon death. Unfortunately, over time, it has become almost negligible.”
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He adds, “By freezing the allowance, the government is effectively imposing a stealth tax increase, diminishing the real value of gifts families can make tax-free.”
To put it in perspective, in 1981, £3,000 represented roughly 16% of the average UK house price, enough to cover a house deposit or even buy a new Mini car. Today, that same £3,000 covers just about 1% of an average house price and is comparable to the cost of an ordinary household boiler replacement.
Furthermore, the £3,000 gift was equivalent to about five months’ salary for the average UK male and nearly eight months for the average UK female in 1981, whereas today it accounts for roughly one month’s salary.
Mitchell-Innes points out, “Because the gift allowance threshold effectively decreases in value each year due to inflation, families must document and track increasingly smaller gifts. A £3,000 gift today might only cover a few months’ rent, which complicates record-keeping during an already stressful period.”
He continues, “This administrative burden adds to the challenges families face when dealing with the estate of a loved one, including submitting inheritance tax returns. Important payments like a £3,000 gift can be overlooked and risk penalties from HMRC.”
In addition to the annual £3,000 allowance, any gifts made during an individual’s lifetime are exempt from inheritance tax if the donor survives for seven years after making the gift. Additionally, individuals may also make gifts from their surplus income, which are similarly exempt from inheritance tax.