Emma Adkins


Wills, Trusts and Probate

Making Gifts and the Effect on Inheritance Tax

Emma Adkins

Recent research conducted on behalf of HMRC found that over a quarter of the population have made gifts of at least £1,000 during their lifetime, with nearly a quarter of people aged 70 and over having made a gift in the two years prior to being surveyed. Gifts can include property, possessions, money or paying money/fees to a third party for the benefit of another person, for example paying for someone else’s education, care fees or housing. Gifts can be made to individuals, trusts, charities or other organisations. Although many people are making gifts, the research found that fewer than half of people who made gifts were aware of the inheritance tax rules and exemptions surrounding those gifts.

Many people have heard of ‘the 7 year rule’ in relation to gifts and inheritance tax. If a person makes a gift, and then dies within 7 years of making that gift (and the gift does not come under any exemption) then the value of the gift is added to the person’s estate when calculating any inheritance tax due on their death. For some people, this may not make a difference, as their estate may still be under the inheritance tax threshold or otherwise exempt from inheritance tax. For others, it may result in inheritance tax being payable. If a person survives for at least 3 years after having made a gift, then only part of the value of the gift is brought back into account on death. This is based on how many years have passed since the gift was made - the closer to 7 years, the lower the amount that is brought back into account. This is known as ‘taper relief’.

Often, gifts are exempt from any inheritance tax consequences immediately, and the 7 year rule does not need to be considered. Below is a brief outline of some of the more commonly used inheritance tax exemptions applicable to gifts:

  • Small gifts exemption – small gifts not exceeding £250 each may be given to any number of people within any one tax year (6th April – 5th April the following year). Providing no one person receives more than £250 then no further inheritance tax consequences will arise.
  • Annual exemption – in addition to the small gifts exemption, a person can make gifts of up to £3,000 in each tax year without any inheritance tax consequences. If this exemption is not utilised in one tax year, it can be carried forward to the next tax year, giving an allowance of £6,000 for that tax year. This ‘carry forward’ can only be claimed once however, meaning £6,000 is the maximum annual exemption that can be claimed by an individual.
  • Normal expenditure out of surplus income – if there is a regular pattern of gifts being made out of a person’s income, and after those gifts have been made the individual is left with sufficient income to maintain his/her usual standard of living, then these gifts can be exempt from inheritance tax. The value of this exemption will vary for different people in different circumstances, as it depends on each individual’s financial situation. It is important to keep accurate records of gifts made, to allow a pattern of gifting to be proved.
  • Wedding and civil partnership gifts – gifts given on or before a wedding or civil partnership ceremony (but being conditional on that ceremony taking place) are exempt from inheritance tax, up to a certain limit. The limit depends on the relationship of the person giving the gift to the couple. Each parent can give £5,000, each grandparent (or remoter ancestor) can give £2,500, either of the couple can give to each other £2,500 and any other person can give £1,000.

It may therefore be the case that you can make more gifts than you realised, when the relevant exemptions are taken into account, although advice specific to your individual circumstances should be obtained. If you are considering making gifts, whether this is with inheritance tax in mind or not, then you should think carefully about the asset(s) you are wanting to give away, the recipient of the gift(s) and also the potential tax consequences of the gift(s).

If you would like advice about gifts and your inheritance tax position then please contact us today and speak to the Wills and Probate team.

Sitemap | Ask a question | Careers | Accessibility | Terms of Use | How we handle your data

© 2020 Fraser Brown Solicitors. Authorised and regulated by the Solicitors Regulation Authority.
SRA Number: 0048586   |SRA |  VAT Number: 116 4751 78

Fraser Brown is a partnership of limited companies. Any references to partners in any document should be taken as being references to the directors of the limited companies and not to individual partners of the firm.