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, eg money, property, possessions
- a loss in value when something’s transferred, eg 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 on any gift married couples or civil partners give each other - as long as they live in the UK permanently.
The original owner must live for 7 years after giving the gift. Any gifts made less than 7 years before death count towards the Inheritance Tax threshold (£325,000). They count towards the threshold before the rest of the estate.
If the donor gave away more than £325,000 of gifts in their final 7 years, tax is due on everything over that threshold.
Gifts made 3 to 7 years before the death
The rate of tax is reduced for gifts made between 3 and 7 years before the person died. This is known as ‘taper relief’.
|Years between gift and death||Percentage of the tax you pay||Effective tax rate
(if not qualified for reduced rate)
|less than 3||100%||40%|
|3 to 4||80%||32%|
|4 to 5||60%||24%|
|5 to 6||40%||16%|
|6 to 7||20%||8%|
When you have to pay Inheritance Tax on a gift you received
If you received a gift from someone who died, you may have to pay Inheritance Tax on it. This could happen if both of the following are true:
- they gave you the gift less than seven years before they died
- they gave £325,000 or more in gifts in the last seven years of their life
HM Revenue and Customs (HMRC) will tell you if you 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 one 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, eg wedding gifts and individual gifts worth up to £250.
There’s no Inheritance Tax on a wedding or civil partnership gift worth up to:
- £5,000 given to a child
- £2,500 given to a grandchild or great-grandchild
- £1,000 given to anyone else
The gift must be given on or shortly before the date of the wedding or civil partnership ceremony.
Gifts up to £250
There’s no Inheritance Tax on individual gifts worth up to £250. You can give as many people as you like up to £250 each in any one tax year.
You can’t give someone another £250 if you’ve given them a gift using a different exemption, eg the £3,000 annual exemption.
If you give someone more than £250 in a year, the whole amount counts - the first £250 is not exempt.
Regular gifts from the giver’s income
There’s no Inheritance Tax on gifts from the deceased’s income (after they paid tax) as long as the deceased had enough money to maintain their normal lifestyle. These gifts include:
- Christmas, birthday and anniversary presents
- life insurance policy premiums
- regular payments into a savings account
Payments to help with living costs
There’s no Inheritance Tax on gifts to help with other people’s living costs. These include payments to:
- an ex-husband, ex-wife or former civil partner
- a relative who’s dependent on them because of old age, illness or disability
- a child (including adopted and step-child) under 18 years old or in full-time education
There’s no Inheritance Tax on gifts to charities, museums, universities or community amateur sports clubs.
There’s no Inheritance Tax on gifts to political parties that have either:
- 2 members elected to the House of Commons
- 1 member elected to the House of Commons and received at least 150,000 votes in a general election