Inheritance Tax and Gifts

Rules on giving gifts

Inheritance Tax may have to be paid after your death on some gifts you’ve given.

Gifts given less than 7 years before you die may be taxed depending on:

• who you give the gift to and their relationship to you
• the value of the gift
• when the gift was given

What counts as a gift

Gifts include:

• money
• household and personal goods, for example, furniture, jewellery or antiques
• a house, land or buildings
• stocks and shares listed on the London Stock Exchange
• unlisted shares you held for less than 2 years before your death

A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.

​​Anything you leave in your will does not count as a gift but is part of your estate. Your estate is all your money, property and possessions left when you die. The value of your estate will be used to work out if Inheritance Tax needs to be paid.

Who does not pay Inheritance Tax

Some gifts are exempt from Inheritance Tax.

There’s no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they:

• live in the UK permanently
• are legally married or in a civil partnership with you

There’s also no Inheritance Tax to pay on any gifts you give to charities or political parties.

Each tax year, you can also give away some money or possessions free of Inheritance Tax. How much is tax free depends on which allowances you use.

Annual exemption

You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.

You can carry any unused annual exemption forward to the next tax year - but only for one tax year.

The tax year runs from 6 April to 5 April the following year.

Small gift allowance

You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.

Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.

Gifts for weddings or civil partnerships

Each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person

If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.

If you make regular payments

You can make regular payments to help with another person’s living costs. There’s no limit to how much you can give tax free, as long as:

• you can afford the payments after meeting your usual living costs
• you pay from your regular monthly income

These are known as ‘normal expenditure out of income’. They include:

• paying rent for your child
• paying into a savings account for a child under 18
• giving financial support to an elderly relative

If you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, except for the small gift allowance.

The 7 year rule

No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.

If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.

Gifts given in the 3 years before your death are taxed at 40%.

Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.

Need advice on Inheritance tax and gifts? Call us for a free no obligtaion chat on 01380 723692