IHT Gift Allowance
Understanding how to use the IHT gift allowance is a simple yet powerful way to manage your estate and reduce the burden of inheritance tax. By making the most of the available gift allowances, you can reduce IHT on your estate and pass on more to your loved ones. Here’s what you need to know to use them effectively.
As the old saying goes, it is better to give than to receive.
But did you know that when you give your loved ones a gift you can also benefit as well as the person you’re giving to?
It may come as a surprise, but when you make gifts as part of your overall inheritance tax planning, you can have the pleasure of giving, bring joy to your loved ones through your generosity, and even reduce your inheritance tax liability at the same time.
However, in order to avoid potential pitfalls, you’ll want to understand the rules first.
1. Know what is defined as a gift
What counts as a gift for inheritance tax purposes?
Simply put, it can be anything that’s part of your estate. Property, cars, cash, investments, jewellery – even collections of stamps, wine, coins or sports memorabilia can be liable to inheritance tax.
One thing to remember is that normally you can’t add conditions to your gifts. For example, if the gift is a car, you can’t continue to drive it. If the gift is a home, you can’t continue to live in it rent-free otherwise inheritance tax may apply.
2. Begin giving early
As soon as you give a gift, an inheritance tax clock starts ticking.
Usually, seven years must pass before your gift is 100% inheritance tax-free.
If you die before this time lapses, the person you’ve given the gift to may owe inheritance tax.
It’s one reason for giving gifts early. When you’re younger you’re more likely to live seven years from the time the gift was given. Making gifts earlier also increases your chance of getting to experience the pleasure that comes from seeing those you love enjoy what you’ve given – and to thank you for it.
Whether you’ve recently become an expat, are in the process of planning to leave the UK, or have been a long term expat and are now preparing to return home, estate planning is essential. Ask yourself: if something happened to you tomorrow, would your spouse or family know where to find your key financial documents?
3. Use annual gift exemptions
Each of us has an annual allowance that permits gifts at or below £3,000, free of inheritance tax in any tax year.
If this full amount isn’t taken one year, it carries over into the next year. This means that if you don’t give the full amount one year, you can give £6,000 the following year. This allowance can only be carried over for one year, however.
Everyone can also give as many gifts as they like below a value of £250.
These gifts are currently inheritance tax-exempt – there’s no seven-year clock ticking.
It’s important to note that you cannot combine this small gift allowance and your annual allowance for any individual. This means that you couldn’t give someone a £3,000 gift and then another £250 small gift.
Donations to charities, including gifts to political parties, can also reduce inheritance tax.
4. There are special rules for weddings
Weddings are gift-giving occasions.
But before handing over a gift to the happy new couple, consider inheritance tax.
You may not be aware, but a wedding gift offers a chance to reduce inheritance tax.
The amount that you can give inheritance tax-free depends on your relationship to the couple and the timing and amount of your gift. Generally, the more closely you’re related to the couple, the more you can give.
So if one of your children marries, you can give up to £5,000.
If a grandchild or great-grandchild marries, this reduces to £2,500 or less.
And if you’re giving to a relative or friend this drops to £1,000.
But don’t wait until after the honeymoon to give your gift.
It must be given before, not after the wedding to avoid attracting inheritance tax.
5. Gifts from income
You can make regular payments to help with another person’s living costs. There’s no limit to how much you can give tax-free, as long as:
- You can afford the payments after meeting your usual living costs
- You pay from your regular monthly income
These are known as “normal expenditure out of income”. They include:
- Paying rent for your child
- Paying into a savings account for a child under 18
- Giving financial support to an elderly relative
6. Document, document, document
It’s very important that you track the details of any gifts that you’ve made to reduce inheritance tax. You’ll need to record whom each gift was given to, the gift they were given, the date the gift was given, and the value of the gift.
It’s also helpful to keep evidence of the gift, for example, you can use a bank statement to evidence a gift of money. This will make it easier to establish if there is any inheritance tax due on your gifts when you die.
Further reading:
Expat guide to UK inheritance tax
How does UK inheritance tax work when a spouse is non-domiciled?
Using life insurance to mitigate Inheritance Tax
The gift that keeps on taking: Understanding gift with reservation of benefit rules
Inheritance Tax Gift Allowance
FAQs
The IHT gift allowance lets you give away up to £3,000 each tax year without the gift being added to your estate for inheritance tax purposes.
Yes, if you don’t use your full £3,000 allowance in one tax year, you can carry it forward to the next year – but only for one year.
You can gift to anyone you like – friends, family, or others – as long as the total amount remains within your £3,000 annual exemption.
Any amount above the £3,000 allowance may be considered a potentially exempt transfer (PET) and could be subject to IHT if you die within seven years of making the gift.
Yes, other exemptions include small gifts of up to £250 per person per year, wedding gifts (ranging from £1,000 to £5,000), and regular gifts from surplus income.
A PET is a gift that’s not immediately subject to IHT but becomes tax-free if you live for at least seven years after making it.
Yes, you can give regular gifts from your surplus income without them being subject to IHT, but they must not affect your standard of living.
Surplus income is any income left over after all your usual living expenses and financial commitments have been met.
Lifetime gifting can help reduce the value of your estate and potentially lower the inheritance tax bill for your heirs, if done within the rules.
Yes, it’s strongly advised to keep clear records of any gifts, including dates, amounts, recipients, and whether they’re from income or capital.
