Inheritance tax planning and tax-free gifts

Gifting your assets to family and friends while you’re alive can be a smart way to reduce the value of your estate and lessen the tax burden for your beneficiaries. But inheritance tax planning can be very complex, so it’s important to get to grips with the rules surrounding tax-free gift-giving.

Gifting your assets to family and friends while you’re alive can be a smart way to reduce the value of your estate and lessen the tax burden for your beneficiaries. But inheritance tax planning can be very complex, so it’s important to get to grips with the rules surrounding tax-free gift-giving.

Debbie Thompson
Life insurance expert
6
minute read
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Posted 5 OCTOBER 2021

What are the tax benefits of gifting? 

If your estate – the value of everything you leave behind – is worth more than £325,000, inheritance tax (IHT) may be charged when you die. But one of the simplest ways to cut your estate’s tax bill is to gift your money or other assets while you’re still alive. 

Some gifts are always tax free, some are potentially tax free and others fall within the annual tax-free gift allowance. 

Giving away assets before you die takes a lot of careful financial planning. You’ll need to work out how much you can afford to give away while still making sure you have enough left over for yourself. It’s well worth speaking to a solicitor or tax adviser for professional advice on your individual circumstances.

What is classed as a gift for inheritance tax purposes? 

A gift can be anything of value that you give unconditionally, such as: 

  • money
  • jewellery, furniture and antiques
  • property or land
  • stocks and shares 

A gift can also be something that has decreased in value. 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 doesn’t count as a gift but is part of your estate, which may be liable for IHT.

How much is the annual gift allowance? 

For each tax year, which runs from 6 April to the following 5 April, everyone has an allowance of £3,000 that they can gift as they please without paying any inheritance tax. This is known as your annual exemption. You can give the whole IHT gift allowance to the same person or split it between several people. 

Anything worth more than the maximum £3,000 tax-free gift limit might be subject to inheritance tax. That said, there are other rules that allow you to give gifts and still remain within the tax-free regulations – more of which we’ll come to later. 

If you don’t use your full gift allowance in one year, it can be carried forward to the next tax year. But it can’t be rolled over beyond that.

How much can I give to my spouse or civil partner tax free? 

Any money or assets you give to your spouse or civil partner are tax free, as long as you both live permanently in the UK. So they can inherit your entire estate without having to pay inheritance tax. 

On top of this, you can also pass on your unused tax-free threshold when you die. This means that if none of the £325,000 inheritance tax threshold was used when the first partner in the couple died, the surviving partner could add it to their own tax-free allowance. 

If you’re in a long-term relationship but not married or in a civil partnership, your partner may have to pay IHT on any inheritance they receive, depending on the size of the estate.

How much can I gift to my child tax free? 

You can give money or assets to family members, including your children, at any time, but that does come with a caveat. As long as you live for more than seven years after you’ve made the gift, they won’t have to pay inheritance tax. They may still have to pay income tax or capital gains tax though, depending on what the gift is. 

If you die within seven years of making the gift, your beneficiaries might have to pay inheritance tax if the gift is more than £3,000 and you’re over the £325,000 IHT threshold. 

So, if you’re thinking about giving away money to family members to reduce inheritance tax, it’s a good idea to plan how you want to do this. Keep a record of: 

  • who you give the gift to
  • the value of the gift
  • when the gift is given 

This will make it easier for the executor of your estate to work out which of your assets are taxable.

How can I give to charity in my will? 

Any cash or assets you leave to UK charities, either while you’re alive or in your will, are exempt from inheritance tax. 

You also won’t have to pay inheritance tax on gifts to: 

  • museums
  • universities
  • the National Trust
  • political parties (under certain conditions)
  • registered housing associations
  • community amateur sports clubs. 

If you leave gifts to charities in your will, you might also qualify for a reduced IHT rate (36% rather than the usual 40%) on your remaining estate. This would only apply if the charity is registered in the UK and the amount you leave is at least 10% of your ‘net’ (taxed) estate. 

And make sure you have the details of the charity exactly right when writing them in your will to avoid disputes after your death.

How else can I give tax free? 

There are other ways you can gift money without paying tax. These include:

  • Small gifts: You can give as many small gifts of up to £250 to anyone you want in each tax year. That’s provided the person receiving the gift hasn’t already benefited from another exemption. Birthday and Christmas gifts you give from your regular income are exempt from IHT.
  • Wedding gifts: You’re allowed to give a tax-free gift to someone tying the knot, but the amount depends on your relationship with the person receiving the money. You can give up to £5,000 to your child, £2,500 to a grandchild or great-grandchild and £1,000 to another relative or friend. The gift must be made before the wedding, and the wedding has to take place for it to qualify.
  • Living costs: Monetary gifts that are aimed at helping to pay for someone else’s living costs can also be exempt from tax. They could be for an elderly relative or a child in rented accommodation, for example.
  • Gifts from surplus income: You can give gifts out of your salary or pension tax-free. For example, regularly paying into your child’s savings account or paying a life insurance premium for your spouse. According to HMRC, these gifts should form some sort of regular spending pattern, otherwise inheritance tax may be due when you die.

Frequently asked questions

What is a potentially exempt transfer?

A potentially exempt transfer, or PET, is a gift that has the potential to be exempt from inheritance tax. It’s dependent upon you surviving for at least seven years after making it.

If you die within the seven-year period, the PET becomes a chargeable transfer and is added to the value of your estate for tax purposes.

What is taper relief?

Even if inheritance tax is payable on a gift, it may be reduced because of something known as 'taper relief'. IHT is charged at the normal 40% rate on gifts given in the three years before you die. But gifts made three to seven years before your death are taxed on a sliding scale, between 8% and 32%. See the table below. 

Years between gift and death

Rate of tax on gift

3-4 years

32%

4-5 years

24%

5-6 years

16%

6-7 years

8%

7 or more years

0%

What reliefs are there from inheritance tax?

Some types of asset receive special relief from inheritance tax. This means there’s been a transfer of something of value, but tax isn’t payable on its full worth. You usually need to claim for this and it must meet certain criteria. 

Businesses, agricultural property, woodland property and heritage assets can all have inheritance tax exemptions. But this is a complex area, so it’s always worth seeking advice from a professional if you want to do more than just gift money to your family.

Who pays inheritance tax on gifts?

If any inheritance tax is due on gifts, it’s usually paid by the estate, unless you give away more than £325,000 in gifts in the seven years before you die. If you’ve given more than this, anyone who received a gift from you in those seven years will have to pay inheritance tax on their gift.

Where can I get advice on estate and tax planning?

It’s sensible to get advice from an expert in estate planning, like a solicitor or an independent financial adviser, before making any decisions.

Use the Financial Conduct Authority’s register to check whether your adviser is authorised, or go to MoneyHelper’s Retirement Adviser Directory to find an estate and tax planning adviser in your area.

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