Small gifts that don’t create an Inheritance Tax liability
HM Revenue & Customs allows you to make a number of small gifts each year without creating an Inheritance Tax liability. Remember, each person has their own allowance, so the amount can be doubled if each spouse or registered civil partner uses their allowances.
You can also make larger gifts, but these are known as ‘Potentially Exempt Transfers’ (PETs), and you could have to pay Inheritance Tax on their value if you die within seven years of making them.
The estate may not have to pay Inheritance Tax on assets the deceased gave away as gifts while they were alive.
A gift can be:
• Anything that has a value, for example, money, property, possessions
• A loss in value when something’s transferred, for example, if a parent sells a house to a child for less than it’s worth, the difference in value counts as a gift
There’s no Inheritance Tax payable on any gift married couples or registered civil partners give each other – as long as they live in the UK permanently.
Taper relief applies where tax, or additional tax, becomes payable on your death in respect of gifts made during your lifetime. The relief works on a sliding scale. The relief is given against the amount of tax you’d have to pay rather than the value of the gift itself. The value of the gift is set when it’s given, not at the time of death.
The original owner must live for seven years after giving the gift. If they don’t, their estate or the person who received it will have to pay Inheritance Tax on it.
The amount due is reduced on a sliding scale if the gift was given away between three and seven years before
the person died.
• You’d made a non-exempt gift of £350,000 on 1 February 2011 and died on 20 June 2014
• The Inheritance Tax nil rate threshold at the date of death was £325,000
• The gift exceeds the threshold by £25,000
• Full rate of tax on the gift: 40% x £25,000 = £10,000.
• The gift was made within three to four years of death, so taper relief at 20%
• Taper relief: £10,000 x 20% = £2,000.
Revised tax charge: £10,000 – £2,000 = £8,000.
When the person who received the gift pays Inheritance Tax
Anyone who received a gift from the deceased in the seven years before they died may have to pay Inheritance Tax if the deceased gave away gifts worth more than £325,000 in that time.
HM Revenue and Customs (HMRC) will tell the person that received the gift if they have to pay Inheritance Tax.
Gifts you don’t pay Inheritance Tax on
The estate doesn’t pay Inheritance Tax on up to £3,000 worth of gifts given away by the deceased in each tax year (6 April to 5 April). This is called the ‘annual exemption’. Leftover annual exemption can be carried over from each tax year to the next, but the maximum exemption is £6,000.
Certain gifts don’t count towards the annual exemption and no Inheritance Tax is due on them, for example, wedding gifts and individual gifts worth up to £250.
There’s no Inheritance Tax on a gift that was a wedding
or registered civil partnership gift worth up to:
• £5,000 to a child
• £2,500 to a grandchild or great- grandchild
• £1,000 to anyone else
The gift must be given on or shortly before the date of the wedding or registered civil partnership ceremony.
Gifts up to £250 There’s no Inheritance Tax payable
on individual gifts worth up to £250 – unless in the same tax year, the deceased gave the same person:
• More than £250 worth of gifts
• Other gifts that are free from Inheritance Tax, for example, a wedding gift or a gift that counts towards their £3,000 annual exemption
Regular gifts from the giver’s income There’s no Inheritance Tax payable on gifts from the deceased’s income (after they paid tax) as long as the deceased had enough money to maintain their normal lifestyle.
The gifts include:
• Christmas, birthday and wedding or registered civil partnership anniversary presents
• Life insurance policy premiums
• Regular payments into a savings account
Payments to help with living costs There’s no Inheritance Tax payable on gifts to help with other people’s living costs.
These include payments to:
• An ex-husband, ex-wife or former registered civil partner
• A relative who’s dependent on them because of old age, illness or disability
• A child (including adopted and stepchild) under 18 years old or in full-time education
There’s no Inheritance Tax payable on gifts to charities, museums, universities or community amateur sports clubs.
Political parties There’s no Inheritance Tax payable
on gifts to political parties that have either:
• Two members elected to the House of Commons
• One member elected to the House of Commons and received at least 150,000 votes in a general election