You may consider gifting money or property to family or friends as part of Inheritance Tax Planning or simply passing on wealth to the next generation. However, there are a few things you should know about gifting and Inheritance Tax. In this article, we will provide a brief overview of gifting and Inheritance Tax, including who you can gift to, how much you can gift, and what it means if you continue to benefit from the gift.

Gifting money (or property) to friends, family, or charity while you are still alive is one of the simplest ways to reduce your Inheritance Tax liability. There are some gifts you can make during your lifetime that will not be taxed after your death, such as gifts to your spouse or civil partner. If you make a gift seven years before your death, it is usually excluded from the value of your estate for Inheritance Tax purposes. Gifting can be a complicated subject, so you should consult with a professional about it as part of your Estate Planning.

What is a gift?

A gift can include:

1. Money
2. Household and personal goods such as furniture, jewellery or vehicles
3. Property or land
4. Stocks and Shares listed on the LSE
5. Unlisted Stocks and Shares owned for less than 2 years prior to death

Who Can I Give Gifts to?

Gifts to your spouse or civil partner are usually tax-free; however, this does not apply to unmarried partners or cohabitants.

If you want to leave gifts to other family members or friends, you should plan ahead of time to figure out the most tax-efficient way to do so. Each financial year, you are entitled to an Inheritance Tax exemption of up to £3,000 per year, which is known as your Annual Allowance. You can carry over your exemption amount to the following financial year if you have not used it but you can only do this for one year. For example, if you do not use any of your allowance in 2021, you can gift up to £6,000 in 2022 but you cannot then gift £9000 in 2023.

Small Gifts

You can give small gifts of up to £250 per person, such as for birthdays or Christmas presents, unless another exemption has been used for the same person.

Wedding Gifts

There is also an exemption for wedding gifts, with the amount you can give depending on your relationship to the couple getting married. You can give up to £5,000 as a parent, £2,500 as a grandparent or great-grandparent, and £1000 as everyone else.

Regular Payments

If you make regular financial payments to assist with another person’s living costs, there is no limit on how much you can give as long as:

1. You can afford the payments after meeting your own living costs
2. You can pay this from your regular income

This can include paying for a child’s rent, paying into a savings account for a child under the age of 18 and giving financial support to an elderly relative.

Retained Benefits

You cannot give someone something if you will continue to benefit from it during your lifetime. The most common example is when a parent gives their home to their child but continues to live in it rent-free until they die. If this is the case, the property will still be included in the estate in the event of death for Inheritance Tax purposes and may also be considered for Care Fees.

7 Year Rule

No tax is due on any gifts if you live for 7 years after given them unless the gift is part of a trust. This is the 7 year rule.

If you die within 7 years of giving a gift, Inheritance Tax could be payable, but the rate of tax depends on when you gave it. This is known as taper relief. The below shows the amount of time between your death and the gift and the applicable rate of tax.