Wills and Probate specialist, Jenny Greenland, explains when and by whom Inheritance Tax is paid on gifts.
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Gifts that you make in your lifetime may be subject to Inheritance Tax (IHT) when you die. Whether IHT is payable will depend on the recipient’s relationship with you, as well as the gift’s value and when it was made.
A lifetime gift can be anything, but most often it will be money, property (ie land and buildings), personal possessions, or shares.
IHT annual exemption
Each tax year, you are allowed to give away up to £3,000 worth of gifts tax-free. In other words, they will not be added to the value of your estate for the purpose of calculating IHT. This is known as your ‘annual exemption’. You can gift £3,000 to just one person, or it can be split between several people. Any unused balance of your annual exemption may be carried forward, but only to the following tax year.
Potentially Exempt Transfer rules
If you give away more than your annual exemption in a single tax year, the gift(s) becomes known as a Potentially Exempt Transfer (PET). When you die, the value of any PETs made in the preceding seven years will be included in your estate, reducing or even eliminating your IHT nil rate band (currently £325,000). A gift made more than seven years from your death will be ignored.
Who pays Inheritance Tax on gifts?
In addition to reducing your nil rate band, there is another consequence of dying within seven years of making a PET. The recipient of your gift may need to pay IHT on the amount of the gift exceeding the nil rate band, unless you specify otherwise in your Will. The amount of IHT they will pay depends on how long you lived after making the gift. This is known as Taper Relief and applies in the following way:
How long since the gift was made? Amount of tax relief
0-3 years No relief
3-4 years 20%
4-5 years 40%
5-6 years 60%
6-7 years 80%
Over 7 years No tax
Small Gift Allowance
You can make any number of gifts of up to £250 in value tax-free to as many people as you wish in a single tax year. The proviso is that you have not used another allowance on the same recipient.
Christmas or Birthday gifts paid from your regular income are also exempt from IHT.
Weddings or Civil Partnership gifts
Wedding or civil partnership gifts can be exempt from IHT, subject to the following limits:
- up to £1,000 for any individual.
- £2,500 for a grandchild or great-grandchild.
- £5,000 for a child.
Timing can be important, and it is best to make the gift before the big day. It is perfectly permissible for the recipient to put the gift towards the cost of the wedding. You can also combine a wedding gift with the annual exemption, which will allow you to give more money to an individual in the tax year of their marriage.
Gifts Between Spouses/Civil Partners
There is no IHT payable on gifts made between spouses or civil partners, provided they are permanently resident in the UK, and your marriage/civil partnership is lawful.
Gifts to charities and political parties
Gifts made to political parties or charities are exempt from IHT.