Inheritance Tax gift rules – Frequently Asked Questions

Inheritance tax continues to be a hot topic – and, as part of their tax planning, one option which many people consider is gifting. Below are answers to some of the common questions which we are asked about the rules on gifting and inheritance tax.

What are the inheritance tax gift exemptions available to me?

When someone passes away, as part of their will being executed, lawyers will review their estate and a value will be calculated for it for inheritance tax purposes. There is no inheritance tax payable on the first £325,000 of the estate’s value.

We recommend robust tax planning for inheritance tax and gifting can be part of this overall planning. By gifting money to friends and family, you can remove money from your estate – reducing its value and therefore its exposure to inheritance tax.

You may be wondering whether there is an inheritance tax gift limit and what the rules are on one-off and regular gifting. You can give away regular amounts each year – an annual £3,000, plus additional amounts for birthday and wedding gifts – without any caveats.

If the exemption is unused, it can be carried forward into the next tax year so you can give away £6,000 – though it can’t be carried any further forward than that. The money can be given to one person or you may choose to split it between several people.

There are inheritance tax gift exemptions for birthday or Christmas gifts. You can give up to £250 per person as a gift each year, providing you haven’t used another allowance on that same person. There’s no limit on the number of people you can gift to in this way, as long as the gifts are no more than £250 per person.

There is also an inheritance tax wedding gift exemption. If your child is getting married, you can gift them up to £5,000. For a grandchild or great-grandchild of yours, you can give them up to £2,500, and for anyone else, the limit is £1,000.

So, if you’ve got big events like a wedding or civil partnership coming up in your family, you could consider giving them cash as a gift, because it would then take that sum out of your estate.

What is the inheritance tax gifts taper relief?

When it comes to gifting, keep in mind the 7 year gift rule. Inheritance tax is still payable on all or some of a gift if the person making the gift passes away within seven years of making it. This is because all or some of the value of the lump sum they gifted would be counted as part of their estate when inheritance tax is calculated.

Keep in mind that there is inheritance tax gifts taper relief – the amount payable in inheritance tax tapers off as those seven years pass. After three years, it would be payable on 80 per cent of the sum which was gifted, and the amount reduces further as more time passes.

After seven years, the sum would not be counted within the gift giver’s estate and no inheritance tax would be payable on it.

Our guidance would be to keep the inheritance tax gifts sliding scale in mind and, if you’re planning to give away a lump sum, consider doing so sooner rather than later.

What are inheritance tax gifts out of income?

If you’ve got excess income, you can make inheritance tax gifts out of income without those gifts becoming part of the value of your estate for inheritance tax purposes. Detailed analysis is needed to prove that the money is excess and that you didn’t need it to live, so always keep good records.

Gifting out of income means you can make regular payments to another person on top of making use of the annual inheritance tax gift exemptions.

Are gifts to charity exempt from inheritance tax?

​If you give to charity in your will, that is generally exempt for inheritance tax purposes.

There is also an inheritance tax and gifts to charity rule which means, if you leave a certain amount of your estate to charity, you can harness an extra tax saving. By leaving 10% or more of your net estate to charity, the rate of inheritance tax payable on the whole estate goes down from 40% to 36% – which means making a 4% tax saving.

To qualify for this tax saving, the rules are that the charity must be a qualifying charity – it must be established in the UK and be a registered charity which is approved by HMRC. Full details of the donation must also be specified in your will. The gift must also be an outright gift to the charity, with no conditions upon it and nothing being held back.

If you need guidance on inheritance tax gift rules, we’re here to help

If you’re looking at inheritance tax planning and wondering if what to do about inheritance tax gifting, then our experts are here to help guide you.