Gifting for Inheritance Tax

Inheritance Tax

In recent years, the allowances for Inheritance Tax (IHT) have remained stagnant. Consequently, an increasing number of individuals are now liable to pay this tax, which is commonly known as the “death tax”. To mitigate this tax, gifting for Inheritance Tax has become more prevalent.

If you are not familiar with how IHT works, here’s our short guide to Inheritance Tax.

The amount of money you can gift to a family member without having to pay taxes will depend on your relationship with them. If you’re gifting money to your spouse or civil partner, you can give an unlimited amount of money without having to pay taxes.

However, tax-free gifts for all other family members will only be possible if they fall within your annual exemption limit.

What is the Annual Exemption Limit for IHT

You are allowed to give up to £3,000 per tax year without any tax implications. This is known as your “annual exemption”. You can either give the entire £3,000 to one person or split it between multiple recipients.

If you haven’t given any money as gifts in the previous tax year, you can carry forward that allowance to the following year. This means that you could increase your tax-free cash gift limit to £6,000 in one year by using two years’ worth of gift allowances.

However, if you do not use your allowance in the second year, the tax-free allowance will reset to £3,000 at the end of that period.

Can I gift more than £3,000?

In principle, you can gift as much money as you wish, but there may be inheritance tax implications for both you and the recipient if the gift is substantial. This is especially true if the donor (the person giving the gift) passes away within seven years of making the gift.

A substantial gift is called a Potentially Exempt Transfer (PET).  If you make a PET to be fully exempted from your Estate and therefore the IHT, you must survive for at least 7 years after the date of the gift.  Please be aware that there may be capital gains tax issues so please seek advice first.

You can also gift up to £5,000 to your children and £2,500 to your grandchildren for their wedding, but the limits were set many years ago and may no longer hold the same value due to inflation.

The seven-year rule for IHT

For inheritance tax purposes, any gift that has been given away by an individual does not count towards the value of their estate after 7 years. This is commonly referred to as “the 7-year rule”. Often, parents choose to give gifts to their children or grandchildren long before they anticipate passing away, to avoid paying tax on the gift.

If you gift money or assets and pass away within 7 years, your estate may be liable for inheritance tax of up to 40%. The rate of tax payable depends on when the gift was made and decreases on a sliding scale basis from the years between your gift and death.

  • Less than 3 years          40%
  • 3 to 4 years                     32%
  • 4 to 5 years                      24%
  • 5 to 6 years                      16%
  • 6 to 7 years                       8%
  • 7 years or more              0%


When you give a gift, it is important to understand the tax implications that may arise from it. In general, if you live for at least 7 years after giving a gift, there will be no inheritance tax to pay on it regardless of who you give it to. But watch out for that Capital Gains Tax.

You can find out more about gifting cash or other items here

But remember everyone has a tax-free threshold which is £325,000.  If you own your own home, you get an extra £175,000.  It may be tempting to gift lots of cash and other valuables whilst you are alive but if your overall Estate is worth less than £325,000 or £500,000 (if you own your home) then you have nothing to worry about.

These limits are more for a couple or if your spouse or partner passed away leaving everything to you.

Therefore, it is important to consider all the tax implications of a gift before giving it to someone.  It is always best to seek professional advice before making any large gifts.

Things to watch out for when Gifting for Inheritance Tax

If you make regular gifts, they may be exempt from inheritance tax, but only under certain criteria.

Exemptions will only apply if the gift is from your net income left over after all your regular expenditures. This means the gifts are not from savings or investments.

We would always recommend you keep a good record of any gifts you give and include them in a copy of your Will.

This is because if cash gifts are not declared correctly, the Executor will be held personally responsible, and HMRC can impose financial penalties which the Executors may have to pay out of their pockets.

What next?

Many of us were expecting the Chancellor to make changes to IHT in the last budget but it didn’t happen.  Some were even expecting Jeremy Hunt to scrap this tax altogether but again it didn’t happen.

It looks like Inheritance Tax is here to stay and if you have concerns about any of it get in touch. Call or email your normal manager at Myers Clark.

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