Gifts and exemptions from Inheritance Tax
Making a gift to your family and friends while you’re alive can be a good way to reduce the value of your estate for Inheritance Tax purposes and benefit your loved ones immediately. But estate and tax planning is a complex area. So getting professional advice can help you avoid several big pitfalls when making a gift.
- How much can I give to my spouse or civil partner tax-free?
- How much can I give to my children and family tax-free?
- How much can I give to charity tax-free?
- How much is the annual ‘gift allowance’?
- What else can I give tax-free?
- What is a ‘potentially exempt transfer’?
- What else is exempt from Inheritance Tax?
- Where to get advice on estate and tax planning
How much can I give to my spouse or civil partner tax-free?
Married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die. In other words, the surviving spouse can inherit the entire estate without having to pay Inheritance Tax.
They can also pass on their unused tax-free allowance to their spouse. For example, if a husband dies and his estate was under £325,000, his wife can take his allowance and add it to her own tax-free allowance.
Gifts to your partner who isn’t married to you however, may incur Inheritance Tax.
How much can I give to my children and family tax-free?
What and how much you wish to give your children or other members of your family is completely up to you. But to ensure that it’s tax-free, it’s important to plan when to make that gift.
Simply put, so long as you live more than 7 years from when you make this gift, your children or family won’t have to pay Inheritance Tax on your gift when you die.
But if you unfortunately don’t live more than 7 years after you’ve made the gift, they may have to pay Inheritance Tax. In this situation, your gift becomes known as a ‘potentially exempt transfer’.
You should also bear in mind that your gift could incur other types of tax, such as Income Tax or Capital Gains Tax. A gift of shares for example, may incur Income Tax. See the Money website for more information.
If you’re thinking about giving away money or assets to your family and friends to reduce Inheritance Tax, it’s very important you make a record of:
- Who you gave it to
- When you gave it
- What you gave, and
- How much it’s worth.
This will make it easier for the executor of your estate to work out during probate what parts of your estate are liable for tax.
How much can I give to charity tax-free?
There is no limit to how much and how often you can give to a charity without incurring Inheritance Tax. You could also get some relief on other types of tax such as Income Tax, when you do this.
If you leave at least 10% or more of the ‘net value’ of your estate, it’s possible to reduce the rate of Inheritance Tax on some assets from 40% to 36%. This could save thousands of pounds.
How much is the annual ‘gift allowance’?
While you’re alive, you have a £3,000 ‘gift allowance’ a year. This is known as an annual exemption. This means that you can give away assets or cash up to a total of £3,000 in a year without incurring Inheritance Tax.
Certain gifts don’t count towards this annual exemption. As such, no Inheritance Tax is due on them. Gifts that are worth more than the £3000 allowance are subject to Inheritance Tax. The amount of tax to pay on these gifts depends on whether it was given within 7 years before the person died.
You can carry over any leftover allowance from one tax year to the next, up to a maximum of £6,000. If you do this, you have to use up all your allowance in that tax year. In other words, you can’t accumulate several years’ worth of allowance and use it up in a single large gift.
What else can I give tax-free?
- Gifts that are worth less than £250
You can give as many gifts of up to £250 to as many people as you want. Although not to anyone who has already received a gift of your whole £3,000 annual exemption. None of these gifts are subject to Inheritance Tax.
Wedding gifts if it’s:
Given to a child and is worth £5,000 or less,
Given to a grandchild or great-grandchild and is worth £2,500 or less, or
Given to another relative or friend and is worth £1,000 or less.
- Gifts to help with living costs
Gifts to help pay the living costs of an ex-spouse, an elderly dependent or a child under 18 or in full-time education are exempt.
- Gifts from your surplus income
If you have enough income to maintain your usual standard of living, you can make gifts from your surplus income. For example, regularly paying into your child’s savings account, or paying a life insurance premium for your spouse or civil partner.
To make use of this exemption, it’s very important that you keep very good records of these gifts. Otherwise, Inheritance Tax is very likely to due on these gifts when you die.
The rules for this exemption are complex - for example, these gifts must be regular, so you need to be committed to keeping up with making these gifts. It’s best to speak to a legal or estate tax adviser first if you want to use this exemption.
If you get it right, this is a good way of making gifts on birthdays or at Christmas, or even to pay life insurance premiums. .
If you give a gift to a charity, museum, university or community amateur sports club, this is exempt from tax. See The tax benefits of giving to charity for more information.
Political party gifts
You can give an Inheritance Tax-free gift to a political party under certain conditions.
What is a ‘potentially exempt transfer’?
You don’t immediately incur Inheritance Tax when you make certain gifts while you’re alive. And if you continue to live more than 7 years after you’ve made the gift, it becomes fully exempt from Inheritance Tax.
During that 7 year period, your gift is known as a ‘potentially exempt transfer’ or PET.
If you do not survive the gift by 7 years, the exemption fails. The PET is counted as part of your estate, and is subject to Inheritance Tax. How much tax is due depends on when it was given – the rate of tax is lower for older gifts.
Gifts where you still have an interest in it - no matter when you’ve given it - don’t qualify as a PET. For example, if you continue to live for free in the house you gave your child more than 10 years ago. The house would still be considered part of your estate and therefore subject to Inheritance Tax. This is known as “reserving a benefit” in the property which you gave away.
A non-cash gift that you make while you’re alive, such as shares or property, could result in you or the recipient of your gift having to pay a hefty Capital Gains Tax.
Before you make that gift, get professional advice to help you and the recipient make the most of your gift.
What else is exempt from Inheritance Tax?
Certain assets are exempt from Inheritance Tax, or at least eligible for a reduced rate. These exemptions are also known as tax reliefs.
Depending on how you own the business and what type of business it is, you can get either 50% or 100% tax relief on it.
Find out more about Business Relief for Inheritance Tax on GOV.UK
You can pass on a farm free from Inheritance Tax. But certain farm assets aren’t exempt from tax, such as farm machinery.
Find out more about Agricultural Relief for Inheritance Tax on GOV.UK
If you leave a woodland property, the land itself is not subject to Inheritance Tax. But the trees on the property are subject to the tax if it’s sold or given away as timber.
The executor of your estate will have to include the value of the woodland when applying for probate even though it’s not considered for Inheritance Tax.
Contact the probate and Inheritance Tax helpline for more information.
If you own a building, land, or objects of national scientific, historic or artistic importance, you could claim relief from Inheritance Tax.
There are however certain conditions that must be met in order to get this relief.
Find out more about tax relief for heritage assets on GOV.UK
- Some gifts depending on the value and when it was given. See What else can I give tax-free? for more information.
Money, assets or property you put into a trust isn’t always exempt from Inheritance Tax. It depends on the type of trust you choose to set up to hold the asset.
Where to get advice on estate and tax planning
When you make your will, it’s always a good idea to plan your estate and what should happen to it when you die.
Making gifts and transfers in your lifetime is one way of planning your estate. It’s a good way of cutting your Inheritance Tax. But the law in this area is quite complex.
The same also applies to putting your assets into a trust for your family to inherit when you die.
It’s best to get advice from an expert in estate planning, such as a solicitor, an accountant, a will writing service or an independent financial adviser.
To search for an estate and tax planning adviser in your area, use:
Money Advice Service Retirement Adviser Directory
Select ‘Inheritance tax planning’ to refine your search results for experts in Inheritance Tax.
- Chartered Institute of Taxation