Inheritance Tax Gifts - what are the rules?
The inheritance tax gift exemption allowance is the amount you can give away each year whilst you are alive without being liable for tax. The current allowance is £3,000 meaning you can give assets or money away every year up to that threshold without worrying about inheritance tax (IHT).
What is the gift tax?
Gift tax is the tax payable on death for gifts of a certain value if your assets exceed the £325,000 inheritance threshold. Whilst gifts like Christmas or Birthday presents are exempt, others may be liable for IHT; it all depends on the type of gift and when it was given.
To understand if the gifts which include money, property and possessions you give to friends and family are taxable, you need to know:
- The current IHT thresholds including the residence benefit
- How much you can gift tax free
- The annual gift tax rules
- The IHT 7 year rule
Why are gifts taxable?
The reason certain gifts are subject to inheritance tax is to stop people with larger estates trying to avoid IHT by giving their money away before they die. If your assets fall within the tax-free allowance, your gifts won’t be affected; however if they’re greater, they may well be.
It’s worth mentioning that a ‘gift’ is classed as something that you give completely to another person and don’t benefit from.
How much can you gift tax free in the UK?
The amount you can gift tax free in the UK if you are liable for inheritance tax is £3,000 a year, known as your annual IHT exemption rate. However, this limit does not apply to married couples or civil partners who can inherit your whole estate tax free.
In addition to the annual exemption rate however, there are other rules that allow you give gifts away to friends, family and charity and still remain within the tax free rules.
So if your assets are greater than the current threshold of £325,00 or £475,000 including the ‘main residence’ allowance, with a little forward planning you can spoil your family whilst reducing your liability for inheritance tax.
What are the gift tax rules?
There are several gift tax rules that allow you to give money and possessions away each year tax free which include:
- Gifts to spouse or civil partner
- Gifts to family
- Wedding costs
- Small gifts
- Gifts to charity
Here's how each works:
Gifting money to a spouse or civil partner
If you’re a married couple or civil partners and live permanently in the UK, you can leave your entire estate to your partner when you die without paying inheritance tax. In addition, you can give gifts of any size to your spouse or civil partner throughout your lifetime tax free.
A spouse or civil partner will also inherit your ‘nil-rate allowance’ when you die which could affectively see their own tax free allowance on death double, so there are definitely benefits for being married where tax is concerned.
Couples who aren’t married will not benefit from the spouse exemptions and may have to pay IHT on any inheritance they receive subject to the size of the estate.
Gifting money to family
You can gift money to family at anytime during your life but anything you gift within 7 years of your death may be subject to inheritance tax if the gift is greater than £3,000 a year and you are over the IHT threshold.
Any unused gift allowance can be carried forward to the following year if not used but it can only be used that year and can not be carried any further forward.
Paying for a wedding
Another inheritance tax exempt gift is a wedding or civil ceremonial gift which is tax free up to the following values:
- £5,000 for a child
- £2,500 for a grandchild
- £1,000 per person
Small gift exemption
Known as the small gift exemption, in addition to the £3,000 IHT annual exemption, you’re also able to give away as many gifts of up to £250 per person per year as you want, as long as the person receiving the gift has not already benefited from any other exemption.
Inheritance tax charity exemption
Any money left to charity will be deducted from your estate and is completely tax free. What’s more if you leave more than 10% of your assets to charity, the normal 40% inheritance tax rate that is applied to assets over the IHT threshold of £325,000 is reduced to 36%.
Inheritance tax 7 year rule
The inheritance tax 7-year rule defines tax payable on gifts given within 7 years of death, if your estate qualifies for IHT. Gifts made within 3 years of death are taxed at 40%; those made within 3 to 7 years are taxed on a sliding scale, known as taper relief.
Any gifts made after the 7 year period will not be taken into account and therefore not subject to IHT which is why future planning is so important.
What is taper relief?
Taper relief is the sliding scale HMRC use to determine how much inheritance tax is made on gifts given with 7 years of death:
|
No. of years before
|
Tax payable
|
|
0 to 3
|
40%
|
|
3 to 4
|
32%
|
|
4 to 5
|
24%
|
|
5 to 6
|
16%
|
|
6 to 7
|
8%
|
|
7 or more
|
0%
|
Normal expenditure out of income exemption
Normal expenditure out of income exemption is one way you can mitigate inheritance tax without the worry of the 7 year tax rule. It allows you to provide regular financial support for another person on an ongoing basis but doesn’t rely on you surviving a certain number of years.
This could include paying rent for a child, savings for a grandchild or providing support for an elderly relative.
There is no limit to the amount you can give tax free or the frequency, as long as you can demonstrate the payment:
- is made as part of your normal expenditure
- comes from your income
- leaves you with sufficient funds to maintain a normal standard of living
Your questions answered
How much money can be legally given to a family member as a gift?
You can give legally give family as much as you want as a gift however if your estate is liable for inheritance tax and you die within 7 years of giving the gift, it may be liable for tax.
How much can you gift in 2023?
Anything you leave your spouse or civil partner throughout your lifetime is tax free; the tax free allowance for family and friends in 2023 is £3,000 a year however there is also the small gift exemption that allows for numerous gifts of up to £250 per person.
Do I have to pay inheritance tax on a gift?
You only have to pay inheritance tax on a gift if the value of your estate is above the tax free allowance and the gift was given within 7 years of death and of greater value than the annual limit of £3,000.
Do I have to pay tax on money gifted to me?
If you have received a gift that is worth more than £3,000 from someone who has died within the last 7 years, you may have to pay IHT is the deceased’s estate is over the tax free threshold.
Will I be charged inheritance tax on gifts to grandchildren?
The rules for inheritance tax on gifts to grandchildren is the same as any family member; you can gift them what you want however if you die within 7 years of giving the gift and your estate is over the IHT threshold, gifts above £3,000 per year may be taxable.