Understanding Inheritance Tax on Gifts in the UK

Inheritance tax on gifts in the UK can catch many people by surprise. If you’re planning to pass on money, property, or valuable items to loved ones, it’s essential to understand how HMRC views these gifts. Depending on the value and timing, some gifts may be tax-free, while others could increase the inheritance tax (IHT) burden on your estate. This guide explains the rules, exemptions, and strategies to reduce or avoid inheritance tax on gifts.

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What Is Inheritance Tax on Gifts?

Inheritance tax on gifts applies when a person gives away assets during their lifetime that are later considered part of their estate for tax purposes. Gifts given within seven years of death may be subject to inheritance tax if they exceed available allowances and exemptions.

Common Types of Gifts That May Be Taxable

• Cash gifts to family or friends
• Property transfers (e.g. gifting a house to a child)
• Valuable items such as jewellery or artwork
• Forgiven debts
• Gifts with strings attached (where the donor still benefits)

These gifts may be added back into the estate’s value when calculating inheritance tax unless specific exemptions apply.

When Is Inheritance Tax on Gifts Charged?

Inheritance tax on gifts is generally only charged if:

• The donor dies within seven years of making the gift
• The gift exceeds the available exemptions
• The total estate (including gifts) exceeds the current nil-rate band (£325,000 as of 2024)

If the donor survives more than seven years after the gift, it becomes exempt—this is known as the 7-year rule. However, if they die within that window, the gift may be taxed on a sliding scale known as taper relief.

Learn more about the current rates on the official HMRC gifts guidance.

Exemptions to Inheritance Tax on Gifts

Not all gifts are taxable. The UK government allows several exemptions that can reduce your exposure to inheritance tax on gifts:

Annual Gift Allowance

Each person can give away up to £3,000 per tax year without it being added to the value of their estate. This is called the annual exemption. If unused one year, it can be carried over once.

Small Gift Exemption

You can give up to £250 per year to as many people as you like, provided they haven’t received part of your £3,000 exemption.

Wedding or Civil Ceremony Gifts

Parents can give up to £5,000 tax-free to a child getting married. Grandparents can give up to £2,500, and anyone else up to £1,000.

Gifts from Regular Income

If you make gifts from income (not savings) and they don’t affect your standard of living, they may be exempt. For example, monthly contributions to a child’s savings account or regular donations to charity.

Gifts to Charities or Political Parties

Gifts to UK-registered charities or political parties are generally free from inheritance tax.

How to Avoid Inheritance Tax on Gifts

If your goal is to avoid inheritance tax on gifts, proper planning is essential. Here are some key strategies to consider:

1. Use Your Annual Allowances

Make use of the £3,000 annual exemption each tax year. Spread out larger gifts over time to avoid triggering tax charges.

2. Plan Gifts Early

Giving gifts earlier in life increases the chance you’ll survive the seven-year window, making the gifts tax-exempt. Early planning is key.

3. Document Gifts

Keep written records of all gifts, dates, and recipients. This will help executors during probate and prevent HMRC disputes.

4. Use Trusts

Trusts can be used to manage and protect assets while reducing inheritance tax exposure. For more, see our guide on inheritance tax planning with trusts.

5. Seek Professional Advice

Each situation is unique. Professional estate planning ensures that gifts are structured effectively and in line with the latest legal changes. Book a free consultation to learn more.

Taper Relief and the 7-Year Rule

If a gift is given more than three but less than seven years before the donor’s death, taper relief may reduce the amount of inheritance tax due:

Keep in mind that taper relief only applies if the total gifts exceed the nil-rate band.

Potentially Exempt Transfers (PETs)

Most gifts are classified as potentially exempt transfers (PETs). This means they are exempt from IHT if the donor survives for seven years. However, if the donor dies earlier, the gift is added to the estate’s value and may be taxed accordingly.

Gifts With Reservation of Benefit

If you gift an asset but continue to benefit from it (e.g. giving away your house but continuing to live in it rent-free), it’s treated as part of your estate for IHT purposes. This is known as a gift with reservation of benefit, and the tax liability remains.

Learn more on HMRC’s official page about gifts with reservation.

Inheritance Tax on Gifts and Property Transfers

If you’re gifting property (like a home) to children or relatives, there are important considerations:

• Gifting your home and continuing to live in it rent-free may not reduce inheritance tax
• If you pay full market rent, the gift may qualify for IHT exemption after 7 years
• You may still need to pay Capital Gains Tax (CGT) if the property is not your main residence

How We Can Help

At MP Estate Planning, we help clients navigate the complexities of inheritance tax on gifts with personalised strategies that ensure tax efficiency and legal compliance. Whether you’re considering gifting cash, property, or using trusts, we’re here to help.

Book your free consultation today or visit our pricing page for clear and affordable packages.

Conclusion

Inheritance tax on gifts can have serious financial consequences if not handled properly. By understanding the rules, using exemptions, and seeking professional advice, you can make tax-efficient gifts that benefit your loved ones while protecting your estate. Early planning is essential, and we’re here to help you every step of the way.

Ready to plan smarter? Explore our full guide to inheritance tax planning for more insights.