Giving away gifts of money, property or possessions is one of the ways people look to pass on their estate without paying inheritance tax (IHT) at the full 40% rate. Some gifts are tax-free, and some gifts have a reduced amount of tax to be paid on them.
Factors that affect whether or not a gift is IHT-free include who the gift is given to, what the gift is, and how long before a person’s death the gift is given.
In this guide to inheritance tax on gifts you will find out everything you need to know about the tax rules surrounding gifts in the UK.
Inheritance tax-free gifts
Whether or not a gift is exempt from tax depends on what the gift is, how much it is worth, who it is given to, and when it is given.
Annual tax-free gift allowance
All people living in the UK have an annual tax-free gift allowance. This means that you can give away up to the value of £3,000 in gifts in a year without this being added to your estate for tax purposes.
If you do not use your tax-free gift allowance within a given year then the remaining amount rolls over to the next year. However, it can only roll-over into the next year: it does not accumulate over multiple years. Therefore the most that your tax-free gift allowance can be in a year is £6,000.
List of exemptions to gift tax
No tax is required to be paid on the following types of gift. They do not count towards the estate even when made in the 7 years before death. They also fall outside of the annual tax-free gift allowance.
Wedding and civil ceremony gifts
Wedding and civil ceremony gifts of value up to £1,000 are exempt from inheritance tax and from your 'annual exemption'.
The limit increases to £5,000 for a child, and £2,500 for grandchildren.
Christmas and birthday gifts
Christmas and birthday gifts are exempt from tax. The only condition of this is that you 'must be able to maintain your standard of living after making the gift'.
Payments to help with another person’s living costs
Payments to support another person's living costs are exempt from tax.
The two most common situations where this applies is supporting a child, or supporting an elderly relative.
You can read more about funding elderly care from our guide to care funding.
Donations to charities, political parties
Gifts to charities and political parties are exempt from tax.
You can use more than one of these exemptions for tax-free gifts on one person e.g. you can buy somebody a wedding gift as well as a birthday gift in a given year. You can also give away as many ‘small gifts’ of up to £250 as you want, as long as you have not used one of the other exemptions on that person.
If you donate 10% or more of your estate to charity in your will, then the inheritance tax rate on the rest of your estate reduces from 40% to 36%. Take a look at our simple guide to writing a Will.
Potentially tax-exempt transfers
‘Potentially tax-exempt transfers’, also known as PETs, refer to all gifts that do not fall under the list of tax-free gifts. PETs are ‘potentially’ tax-free because whether or not inheritance tax is paid on them depends on when the gift is made.
If the gift is made more than 7 years before the gift-giver’s death, then no inheritance tax is due. A gift like this that ends up not being taxed can be described as a ‘successful PET’. However, if a person dies within 7 years of giving a gift, it will be considered as part of their estate for inheritance tax purposes.
Usually, your tax-free allowance will consider gifts before it considers the remaining estate. For this reason, gifts are rarely taxed, unless the sum of the gifts exceeds the £325,000 tax-free IHT threshold.
Even if the gift becomes eligible for inheritance tax, it will not necessarily be taxed at the standard 40% rate. This is because of inheritance tax ‘taper relief‘.
Inheritance tax 'taper relief'
Gifts made 3 to 7 years before the gift-giver’s death are taxed on a sliding scale known as ‘taper relief’. Gifts made in the 3 years before the death are taxed at the full rate of 40%.
The table on the right shows the inheritance tax rate for gifts made in each of the years 1-7 prior to the gifter’s death.
3 Examples of IHT Taper Relief
In the following hypothetical scenarios, we will see how much inheritance tax is paid. In all 3 of these situations, an individual is seeking to pass on some of their £500,000 estate in the form of gifts before their death. We will see how the timing and size of gifts affects how much tax ends up being paid
It is worth keeping in mind that if a person with a £500,000 estate gave no money away as gifts then they would have to pay tax on the whole of the sum between the £325,000 threshold and the £500,000 estate. That would mean paying 40% tax on the remaining £175,000 – a total of £70,000 in tax.
Situation 1: A one-off gift made 10 years before death
John gifts his son £100,000 10 years before his death.
Because this is more than 7 years before John's death, no inheritance tax is due to be paid on the gift.
There is £400,000 left in John's estate when he dies. This is £75,000 more than the £325,000 threshold, so he will pay 40% tax on the £75,000.
In total, £28,000 tax is therefore paid on John's estate.
Situation 2: 2 gifts, made 6 and 2 years before death
Mary gifts her daughter £300,000 6 years before her death. This is tax-free as it is within her £325,000 tax-free allowance.
Mary then gifts her son £125,000 2 years before her death. £25,000 of this is tax-free as part of her remaining tax-free allowance.
The remaining £100,000 of this gift is eligible for inheritance tax. Because the gift was made only 2 years before Mary's death, it will be taxed at the full rate of 40%.
The tax paid on the gift will be £40,000.
The ungifted £75,000 in Mary's estate will also be taxed at 40%, adding another £30,000 in tax.
In total, £70,000 will therefore be paid in inheritance tax on Mary's estate.
Situation 3: 2 gifts, made 6 and 5 years before death
Violet gifts her son £200,000 6 years before her death. No tax is paid on this as it is within her tax-free personal allowance.
Violet gifts her daughter £225,000 5 years before her death. £125,000 of this is tax-free, using up the rest of Violet's tax-free personal allowance.
This means IHT must be paid on the remaining £100,000 of this gift. The gift was made 5 years before Violet's death, so the tax rate is 16% due to taper relief.
This means that £16,000 will be paid in IHT on this gift.
The full inheritance tax rate of 40% has to be paid on the £75,000 remaining in Violet's estate, as she had used up all of her tax-free personal allowance. This adds £30,000 in IHT.
In total, £44,000 of inheritance tax is therefore paid on Violet's estate.
Gifts and Inheritance Tax Frequently Asked Questions
Can property be a tax-free gift?
No, a gift of property is not exempt from inheritance tax. Property is considered to be a part of the estate. However, the tax-free allowance is increased by £175,000 when property is passed on to a direct descendant.
What if there is no formal proof that a gift has been made?
You should ensure that there is a detailed and accurate record of large gifts that you have made, including the value of the gift and the date it was made. This can help to avoid dispute with HMRC about when a gift was made, and how much tax is owed on it.
What happens if no Will is left?
If no Will is left behind, then the estate is divided and shared out according to certain rules - this is called Intestacy. This will have implications for the amount of tax that needs to be paid.
Do you need to pay inheritance tax on gifts that you have received?
In most cases, gifts come out of the tax-free allowance first, so tax is rarely due on them.
If a gift has been made above the tax-free allowance, then the person who receives the gift is responsible for paying inheritance tax. If they refuse to do so, or cannot, then the tax is paid out from the estate of the deceased.
If you would like advice about your circumstances in regards to making a gift, and whether or not it will be eligible for IHT, you can contact the Inheritance Tax Helpline on 0300 123 1072.