Inheritance Tax Relief for Gifts
What you need to know about Inheritance Tax reliefs for gifts
What counts as a gift?
Inheritance Tax may apply to certain assets given as gifts while your loved one was alive. The following are considered gifts:
- Anything which has a value (e.g. money, property, cars)
- When value is lost after transferring assets, such as when a parent sells a property to their child for less than it is actually worth (the difference in the amount is considered a gift)
When do I need to pay Inheritance Tax on a gift?
You may have to pay if you have been given a gift less than seven years before the person’s death occurred and/ or if they gave you £325,000 or more in gifts in their final seven years.
There is no tax on gifts given to a spouse or civil partner if they live permanently in the UK.
Contact HM Revenue and Customs (HMRC) to see if you will have to pay Inheritance Tax.
The seven-year rule
For the gift to be Inheritance Tax-free, the person who was given the gift must live with it for at least seven years before the death of its last owner.
However, the value of a gift will count towards the £325,000 Inheritance Tax threshold if it was given less than seven years before the death. Those types of gift will count towards the threshold before other assets when calculating the value of the estate.
In case the donor gave over £325,000 in gifts in their last seven years before their death, tax should be paid on everything over this amount.
Taper Relief is the reduced tax rate on gifts over the £325,000 threshold which were given between three and seven years before the death of a person.
See below the percentage of tax due according to how long before the death the gift was given:
- Gifts made less than 3 years before the death: 40%
- Gifts made between 3 and 4 years before the death: 32%
- Gifts made between 4 and 5 years before the death: 24%
- Gifts made between 5 and 6 years before the death: 16%
- Gifts made between 6 and 7 years before the death: 8%
These rates are applicable if the gift does not qualify for the reduced Inheritance Tax rates.
Inheritance Tax-free gifts
The estate does not pay Inheritance Tax if your loved one gave up to £ 3,000 worth of gifts per tax year (from 6 April to 5 April) before their death. This is called annual exemption.
Leftover annual Inheritance Tax exemption can be carried over from tax year to tax year, with the maximum exemption being of £6,000.
Some gifts, however, are Inheritance Tax-free and do not count towards the annual tax exemption, such as wedding gifts.
Wedding or civil partnership gifts are exempt up to a certain threshold, depending on the relationship. These are:
- £5,000 given to a child
- £2,500 given to a grandchild or great-grandchild
- £1,000 given to anyone else
For the wedding or civil partnership gift to be exempt it must be given shortly before the date of the ceremony.
Gifts up to £250
Individual gifts worth up to £250 are exempt – you can give them to as many people as you want in one tax year.
You cannot use this type of exemption, however, if you have given another gift to the same person using another type of exemption.
If the gift is worth more than £250, the tax will be paid and its rate will be calculated according to the total cost of the gift.
Gifts from your loved one’s regular income
No Inheritance Tax applies on gifts that were given regularly from your loved one’s income (after tax), so long as they could maintain their lifestyle.
Some examples of these gifts are:
- Presents on Christmas, birthdays and anniversaries
- Premiums of life insurance policies
- Savings accounts regular payments
Payments to help towards living costs
No Inheritance Tax is due when the gifts are towards helping others with their living costs. The three most common examples of people in this situation are:
- Children (including adopted or stepchildren) under 18 years old and studying full-time
- Ex- husbands, ex-wives and former civil partners
- Relatives with financial difficulties due to illness, disability or old age
Gifts given to charities, museums, universities or community amateur sports clubs are also exempt. You can reduce Inheritance Tax by donating to charity.
Gifts to political parties
Inheritance Tax does not apply to gifts to political parties, provided that the party has either two members elected to the House of Commons, or one member elected with at least 150,000 votes in a general election to the House of Commons.