Gifts and Inheritance Tax reliefs and exemptions
There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.
There’s also 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.
Other gifts count towards the value of your estate. There may be Inheritance Tax to pay if you’ve given away more than £325,000, but only if you die within 7 years.
Inheritance Tax on gifts is paid by the person who received the gift (the ‘beneficiary’) - not the estate.
What counts as a gift?
A gift can be:
- anything that has a value, such as money, property, possessions
- a loss in value when something’s transferred, for example if you sell your house to your child for less than its worth, the difference in value counts as a gift
You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can carry any unused annual exemption forward to the next year - but only for one year.
Each tax year, you can also give away:
- wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great grandchild, £5,000 for a child)
- normal gifts out of your income, for example Christmas or birthday presents - you must still be able to maintain your standard of living after making the gift
- payments to help with another person’s living costs, such as an elderly relative or a child under 18
- gifts to charities and political parties
You can use more than one of these exemptions on the same person - for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.
You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.
The 7-year rule
If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.
Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’, however, gifts are not counted towards the value of your estate after 7 years.