Gifting and Inheritance Tax exemptions

It is important to note that a possible change to gifting could be announced in the upcoming Autumn Budget as the Chancellor looks to close the widening fiscal gap.

What is a gift?

A gift is any value you transfer to someone else without receiving full market value in return, including money, property, shares, and valuables. This can also include helping with a house deposit or transferring an asset to someone else.

Lifetime gifts are exempt from Inheritance Tax if they fall within the Annual Allowance (£3,000 per year) or Small Gift Exemption (£250 per person per year). If you have a larger income, you may qualify for the normal expenditure out of income exemption, which has no limit. Larger gifts are possible but come with conditions; if you die within seven years of making a gift, it may be included in your estate for IHT purposes.

What is the seven-year rule?

The seven-year rule states that lifetime gifts between individuals are considered Potentially Exempt Transfers (PETs) and become exempt from Inheritance Tax if the donor survives for seven years after making the gifts.

Top gifting tips for effective Inheritance Tax planning

Using chargeable transfers and Trusts correctly

There is a common misconception that Inheritance Tax is a death tax. However, if an individual makes a lifetime gift, the value transferred by that gift may also be chargeable to Inheritance Tax.

The most common form of chargeable transfer is a gift to a Trust. Although this may be a useful tool in protecting wealth and managing your Inheritance Tax exposure, it can result in an immediate lifetime Inheritance Tax charge.

Understanding Potentially Exempt Transfers rules

If a gift made is neither a chargeable transfer nor an exempt transfer, it is classed as a Potentially Exempt Transfer (PET). This is treated as an exempt transfer while the donor is alive and will only become chargeable to Inheritance Tax if the donor dies within seven years of making the gift.

Making a gift during your lifetime and surviving those seven years is a common form of Inheritance Tax planning.

Mitigating the impact on your Nil Rate Band

Every individual has a Nil Rate Band of £325,000, which can be applied to lifetime chargeable transfers, failed Potentially Exempt Transfers upon death, and against the death estate before an Inheritance Tax charge is applied.

If, however, you make gifts during your lifetime that aren't covered by your tax-free gift allowances, and you die within seven years of making the gifts, the value of these gifts will reduce or eliminate your Nil Rate Band. It is also worth noting that the rate of Inheritance Tax applied to gifts made more than three years before death is lower than the rate applied on death.

Making use of gifts exempt from Inheritance Tax

The following gifts can be exempt from Inheritance Tax, regardless of whether you survive seven years:

• You can gift £3,000 each tax year (the annual exemption) and use any unused allowance from the previous year.
• You can gift up to £250 to any one person in a tax year, if you have not used another allowance on the same person
• Each tax year, an individual can give a tax-free gift to someone who is getting married or entering a civil partnership. This can be up to:
  • £5,000 to a child
  • £2,500 to a grandchild or great-grandchild
  • £1,000 to any other person
• A lifetime gift is exempt from Inheritance Tax if it meets HMRC’s criteria for "normal expenditure out of income." This means it should be a regular gift made every year while allowing the donor to maintain their usual standard of living. Exemptions also apply to life assurance or personal pension premiums paid for someone else, and to regular small gifts like cash for birthdays or Christmas.
• The transfer of any asset by an individual to a spouse or civil partner either during lifetime or on death is completely exempt from Inheritance Tax. The only exception to this is if the donor spouse or civil partner is a long-term UK resident person, and the recipient spouse or civil partner is not long-term UK resident (unless they make an election to be treated as long-term UK resident). In this instance, only the first £325,000 of the transfer is exempt from Inheritance Tax.

There can also be Capital Gains Tax (CGT) implications of making lifetime gifts unless the gift is of cash or an exempt asset.

Being aware of the Capital Gains Tax (CGT) implications of gifting

When gifting an asset, be aware that it counts as a disposal for Capital Gains Tax purposes. Unless the gifted asset is specifically exempt (for example, cars), most assets other than cash in Sterling are considered assets for Capital Gains Tax purposes.

Most individuals have a Capital Gains Tax annual exemption, currently £3,000. Anything over this may be subject to either 18% if you are a basic rate taxpayer, or 24% if you are a higher rate taxpayer.

In addition, transfers between spouses and civil partners take place at no gain or loss (unless separated and not living together), which means that assets can pass freely between them, without incurring a Capital Gains Tax charge.

Gifts to charities are treated in the same way. An individual may wish to consider transferring some assets, or part of an asset, before a disposal, to utilise a spouse or civil partner's annual exemption if they are not already using it.

Utilising Business Relief before April 2026 changes

Business Relief allows for the transfer of qualifying assets, such as a trading business, shares in an unlisted company, and business property, without incurring any Inheritance Tax charges. However, it is important to note that starting in April 2026, Business Relief will undergo significant changes. The current 100% tax-free relief will be reduced to 50% for assets valued over £1 million.

These changes are expected to have a significant impact on family businesses, farmers, and landowners. They will also be affected by similar changes to Agricultural Property Relief.

Read more on these changes here

Speak with our Inheritance Tax specialists

If you are considering estate planning and would like to speak with an adviser on gifting strategies to help manage your Inheritance Tax exposure, please get in touch today.

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