There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.
There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.
Other gifts count towards the value of your estate.
People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death.
What counts as a gift
A gift can be:
- anything that has a value, such as money, property, possessions
- a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift
Call the Inheritance Tax and probate helpline if you’re not sure.
You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can carry any unused annual exemption forward to the next year - but only for one year.
Each tax year, you can also give away:
- wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
- normal gifts out of your income, for example Christmas or birthday presents - you must be able to maintain your standard of living after making the gift
- payments to help with another person’s living costs, such as an elderly relative or a child under 18
- gifts to charities and political parties
You can use more than one of these exemptions on the same person - for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.
Small gifts up to £250
You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
The 7 year rule
If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.
Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
|Years between gift and death||Tax paid|
|less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
Example Sally died on 1 July 2018. She was not married or in a civil partnership when she died.
Sally left 3 gifts in the 7 years before her death:
- £300,000 to her brother 6.5 years before her death
- £50,000 to her sister 4.5 years before her death
- £150,000 to her friend 3.5 years before her death
There’s a £325,000 inheritance tax threshold. Anything below this amount is tax free.
£300,000 is used up by the gift Sally gave her brother. There’s no tax to pay on his gift.
The remaining £25,000 is used up by her £50,000 gift to her sister. There’s tax to pay on the amount not covered by the threshold. That means there’s tax to pay on £25,000 of the gift to Sally’s sister at a rate of 24%.
The £150,000 gift given to her friend is taxed at a rate of 32%.
Sally’s remaining estate was valued at £500,000 and charged at the usual 40% inheritance tax rate. Sally used up the tax-free threshold on gifts given before her death.
Gifts are not counted towards the value of your estate after 7 years.