Rules & Regulations for Inheritance Tax on Gifts

aafra9
Sep 15
5 min read

Book Meeting One-to-One

Book Now

When planning your estate, it’s important to understand how Inheritance Tax on Gifts (IHT) applies to gifts you make during your lifetime. Some gifts are completely tax-free, while others may be subject to Inheritance Tax if you pass away within 7 years of giving them.

What Counts as a Inheritance Tax on Gifts?

For Inheritance Tax on gifts can include:

Money
Household or personal goods (e.g., furniture, jewellery, antiques)
Property (a house, land, or buildings)
Stocks and shares listed on the London Stock Exchange
Unlisted shares you owned for less than 2 years before your death

👉 Even selling something for less than market value counts as a gift. For example, selling your home to your child below market price – the difference is treated as a gift.

⚠️ Anything left in your will is not considered a gift – it becomes part of your estate.

Thinking of gifting property or money? Know the tax rules first. Speak to PKPI Chartered Accountants for expert advice today!

Who Doesn’t Pay Inheritance Tax on Gifts?

Some gifts are completely exempt from Inheritance Tax, such as:

Gifts between spouses or civil partners (if both live permanently in the UK).
Gifts to charities or political parties.

There is no limit to how much you can give in these cases.

Inheritance Tax on Gifts Allowances

Each tax year (6 April to 5 April), you can give away certain amounts tax-free:

1. Annual Exemption

You can give away up to £3,000 per year without it being added to your estate.
You can split this across multiple people.
If unused, you can carry it forward for one year only.

Example:

In 2023/24, Mark gave £2,000 to his daughter Jane (within his annual exemption).
In 2024/25, he gave £4,000 to his daughter Sarah.
He used his £3,000 exemption plus £1,000 carried over from the previous year.

Even if he dies within 7 years, no IHT is due.

2. Small Gift Allowance

You can give gifts of up to £250 per person each year.
This can’t be combined with other allowances for the same person.
Birthday or Christmas gifts from your regular income are also exempt.

3. Wedding or Civil Partnership Gifts

£5,000 to a child
£2,500 to a grandchild or great-grandchild
£1,000 to anyone else

👉 You can combine this with the annual exemption.

4. Regular Payments from Income

You can make regular tax-free payments (known as normal expenditure out of income) if:

They come from your regular income (not savings).
You can afford them after covering living costs.

Examples:

Paying rent for a child.
Contributing to a child’s savings account.
Supporting an elderly relative.

The 7-Year Rule

Gifts may be exempt if you live for 7 years after giving them.

3 years or less before death: taxed at 40%.
3 to 7 years before death: taxed at a reduced rate (taper relief).

Years between gift & death	Tax rate
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7+ years	0%

Gifts You Still Benefit From

If you give something away but still use it, it counts as part of your estate. This is called a gift with reservation.

Examples include:

Gifting your home but continuing to live there.
Gifting a caravan but still using it for holidays.
Gifting a painting but keeping it on your wall.

Keeping Records

It’s essential to keep clear records of:

What you gave.
Who you gave it to.
The date and value of the gift.

This helps the executor of your estate calculate whether Inheritance Tax applies.

How Inheritance Tax on Gifts is Paid ?

Usually, the estate pays any IHT due.
If you gave away more than £325,000 in gifts within 7 years of your death, the person receiving the gift may have to pay the tax.

Example:

Sally died in July 2022. She gave:

£50,000 to her brother (9 years before death – exempt).
£325,000 to her sister (4 years before death – within allowance, no IHT).
£100,000 to her friend (3 years before death – taxable at 32% = £32,000).

Her remaining estate (£400,000) is taxed at 40%, resulting in £160,000 IHT.

By understanding these rules, you can plan ahead, use your allowances wisely, and reduce the potential Inheritance Tax burden for your loved ones.

Thinking of gifting property or money? Know the tax rules first. Speak to PKPI Chartered Accountants for expert advice today!

1. What is the 7-year rule for Inheritance Tax on gifts?

The 7-year rule means that if you give away money, property, or assets and live for at least 7 years after the gift, it is usually exempt from Inheritance Tax (IHT). If you die within 7 years, the gift may be taxed depending on when it was given, with taper relief reducing the tax rate for gifts made 3–7 years before death.

2. Which gifts are exempt from Inheritance Tax in the UK?

Some gifts are completely tax-free, including:

Gifts to your spouse or civil partner (if they live in the UK).
Gifts to charities or political parties.
Small gifts of up to £250 per person per year.
Annual exemption of up to £3,000 per tax year.
Wedding or civil partnership gifts (up to £5,000 for a child, £2,500 for a grandchild, or £1,000 for others).

3. How much can I give as a gift without paying Inheritance Tax?

You can give away up to £3,000 each tax year under the annual exemption, plus as many small gifts of £250 or less per person as you like. You can also combine exemptions, for example by giving your child a £3,000 annual gift plus a £5,000 wedding gift in the same year.

4. What happens if I give my house to my children before I die?

If you gift your home to your children and move out, there’s normally no Inheritance Tax to pay if you live for 7 more years. However, if you continue to live in the house without paying full market rent, it will be treated as a gift with reservation and added back into your estate for tax purposes.

Smart gifting = less tax, more for your loved ones. Let PKPI Chartered Accountants guide you through Inheritance Tax planning.

5. Do I need to keep records of the gifts I give?

Yes. Keeping records helps your executor calculate whether Inheritance Tax applies. You should record:

The date of each gift.
The amount or value of the gift.
Who received it.

This is especially important if you give large gifts, as HMRC will look at the last 7 years of your life when assessing IHT.

Plan your gifts smartly and minimize Inheritance Tax! Visit PKPI Chartered Accountants get expert guidance on IHT rules, exemptions, and allowances—secure your family’s future today.