Gifting money or assets to loved ones is a generous act, but it’s important to understand the tax rules involved, especially regarding Inheritance Tax (IHT). Here’s a breakdown of the key points you should know:
Annual Exemption
Each tax year, you can gift up to a total value of £3,000 without incurring any IHT. If you don’t use your annual exemption, it can be carried forward for one year, but no longer.
Small Gifts
You can give small gifts of up to £250 to as many people as you like each tax year, and these are exempt from IHT. However, this exemption applies only if you haven’t already used another allowance on the same person. Additionally, Birthday and Christmas gifts made from your regular income are also exempt from IHT.
Wedding and Civil Partnership Gifts
Cash or gifts for weddings or civil partnerships are tax-free up to specific limits:
£5,000 from a parent
£2,500 from a grandparent or great-grandparent
£1,000 from other individuals
These exemptions apply equally to weddings and civil partnerships.
Gifts Out of Normal Expenditure
Gifts made from your regular income are exempt from IHT, provided these don’t reduce your income to a level that impacts your usual standard of living.
Seven-Year Rule
Gifts become IHT-exempt if you survive for seven years after giving them, unless the gift is part of a trust. If you pass away within seven years, the gift may still be subject to IHT. A sliding scale of tax relief, known as taper relief, may apply depending on how long you survive after making the gift.
Potentially Exempt Transfers (PETs)
Potentially Exempt Transfers (PETs) allow individuals to make gifts of unlimited value that can become exempt from Inheritance Tax (IHT) if the donor survives for seven years. However, PETs must meet specific conditions to qualify, and certain exceptions may apply. If the donor does not survive the seven-year period, the value of the gift will be included in the donor’s estate and could be subject to IHT, with the tax potentially reduced through taper relief depending on how long the donor lived after making the gift.
Taper relief
| Years between gift and death | Rate of tax on the gift |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more | 0% |
Exempt Beneficiaries
Certain gifts are exempt from Inheritance Tax (IHT) regardless of timing. For example, gifts to a spouse or civil partner who lives in the UK permanently are generally IHT-free. However, this only applies if you remain legally married or in a civil partnership with the person giving the gift.
Why Gifting Matters for Tax Planning
Gifting is a common and heartfelt practice, but it’s essential to consider the potential tax implications. By understanding the rules, you can make informed decisions and reduce your IHT liability.
If you have any questions or wish to explore your options, reach out to us. Our team of experts is ready to assist you. please don’t hesitate to contact us on 0333 241 3350 or email info@richmondhousewm.co.uk
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