Inheritance tax planning and tax-free gifts

Updated: Jan 24

Can I give money away to avoid inheritance tax?

If your estate is worth more than £325,000 (or £650,000 for married couples and civil partners), it's likely some of it will pass to HMRC in inheritance tax when you pass away.

One of the most straightforward ways to make sure tax isn't charged unnecessarily is to consider giving away assets while you are still alive. You're allowed to make some gifts without any tax being due after your death. These usually include gifts to your spouse or civil partner, or if you'd like to leave money to a charity. Most of the time it also includes gifts to individuals made more than seven years before your death. 


However, if you make a gift within seven years of your death, it may be included in your estate for inheritance tax purposes. There may also be inheritance tax due if you put your money in a trust, or if you're passing on ownership or shares in a business (although you may be able to get business relief – which is explained further on gov.uk). 

£0

Amount of tax due on gifts to your spouse or civil partner.




Seven

Number of years you have between gifting something to an individual that isn't your spouse and your death to ensure it's tax-free



£3,000

The total amount you can give in gifts in an tax year while you're alive (your 'annual exemption').



£250

Maximum amount you can gift an individual in a tax-year that hasn't benefited from your annual exemption.



£0

Amount of tax due on gifts given for maintenance of old or infirm relatives.



18

The age up to which you can gift your children with maintenance for their education or training tax-free



£5,000

The amount a parent can gift their child for their wedding tax-free




£0

Tax due on gifts to charities or political parties





Who can I give money to tax-free?


Gifts to your spouse or civil partner and inheritance tax

These gifts are usually tax-free. This doesn't include unmarried partners. You can find out more in our guide to inheritance tax for married couples and civil partners.


Gifts to your family or other individuals

If you wish to leave money to other family members, such as your children, it's a good idea to plan how you want to do this.  Some gifts are best to give while you're still alive rather than leave in your will. Most gifts to people made more than seven years before your death are tax-free (they must be to people, rather than trusts or businesses).  These gifts are called 'potentially exempt transfers', because tax might be payable, depending on whether you survive seven years since the gift. Potentially exempt transfers are explained further below.

Gifts that benefit you

You can't gift someone something that you will still maintain a benefit from in your lifetime and benefit from the gifting rules. For example, if you give away your home but continue to live in it rent-free until your death, you'll be deemed to be the beneficial owner, and it will still be taxed as part of your estate when you pass away. 


What is the 'annual exemption' for inheritance tax?

You can give up to £3,000 in total in each tax year that you're alive. You can carry any unused part forward one year only to the next year (so if you didn't use this allowance last year you could give away a total of £6,000). This gift is technically called your 'annual exemption'. As a couple, that means you'll usually be able to give away £6,000, and potentially £12,000 if you didn't make any substantial gifts the year before.


Which gifts are tax-free?

Small gifts of less than £250

Gifts from income

Wedding gifts

Donations to charities and political parties

'Potentially exempt transfers' for inheritance tax

Most gifts you make to other people during your lifetime (unless they fall into the list of tax-free gifts) are classified as ‘potentially exempt transfers’ or PETs for short.

If you survive for seven years after making the gift, no inheritance tax is due.

However, if you die within this time, the gift will be considered part of your estate for inheritance tax purposes. Generally PETs are applied to your £325,000 tax-free allowance before the rest of your estate. 


So, unless you've given gifts worth more than this allowance, the recipients are very unlikely to pay inheritance tax.


However, if much of the tax-free allowance has been used up against PETs and taxable lifetime gifts, this can leave little or no allowance to be used against the rest of the estate. 


What is IHT 'taper relief'?

Even if tax does become due on a gift, the tax may be reduced because of 'taper relief'. The chart below explains how taper relief can reduce tax due on potentially exempt transfers (PETs).

While taper relief may reduce tax on PETs if you die within seven years of making them, it won't reduce the tax due on your estate as a whole.


If that seems complex, consider the following examples, all of which involve trying to pass on £600,000, partially as gifts

and partially as a final estate.



Example one: gift below the nil-rate band

Example two: gift above the nil-rate band

Example three: gift more than seven years before death

Example four: multiple gifts



 


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