Making tax free gifts

Published on 27th August 2019

The National Centre for Social Research (NCSR) and the Institute for Fiscal Studies (IFS) has found that there is a ‘staggering lack of awareness’ of the inheritance tax (IHT) implications of making a financial gift.

£3,000 exemption

Every year, an individual may give gifts of up to £3,000 without being charged any IHT. Any unused amount may be carried forward for one year only.

Other exemptions

Exemptions include:

  • Giving as many gifts as you want of up to £250 per person per tax year.
  • Gifts between spouses/civil partners are exempt from IHT and, on death, a spouse can pass on their unused Nil-Rate Band.
  • Wedding gifts of up to £5,000 made to children; up to £2,500 to grandchildren or great-grandchildren; and up to £1,000 if gifted to another relative or friend.
  • Gifts to registered charities, and political parties, under certain conditions.
  • Gifts to help with family maintenance, in the form of transfer of property on divorce; gifts to children aged under 18 or in full-time education; or gifts towards living costs of a dependent.

Normal expenditure out of income is outside the scope of IHT. If the individual can give away income without it reducing their standard of living, then the gift falls outside of IHT.

Potentially Exempt Transfers

Potentially Exempt Transfers (PETs) are transfers or gifts that may be exempt. Here, a person may choose to gift up to the IHT threshold without incurring any IHT. Other taxes may need to be considered.
If the donor dies within seven years of making the large gift, then IHT will be due. The amount of IHT due is dependent on how many years since the gift was given.
The tax rate on Gifts made within three to seven years before a donor’s death are on a sliding scale known as ‘taper relief’ and after seven years no IHT is due.

The IHT threshold

The IHT threshold (or Nil-Rate Band) for an individual is £325,000, and potentially £650,000 for married couples/ civil partners upon the second  death. An additional Residence Nil-Rate Band (RNRB) is available for estates which include residential properties. Any unused RNRB can be transferred between spouses upon the first death.

There may be scope for substantial savings when planning your estate by making gifts, so please do get in touch.