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Gifts and exemptions from Inheritance Tax

A gift is the voluntary transfer of cash, tangible items, or property from one person (the donor or grantor) to another (the donee or grantee). When making inheritance tax gifts during your lifetime, you can significantly reduce the value of your estate for inheritance tax purposes, which helps your loved ones benefit immediately.

It is important to understand the rules around gifts and inheritance tax. You are allowed an annual exemption of £3,000 on gifts, meaning you can give up to this amount without it counting towards your estate's value for inheritance tax calculations. Furthermore, gifts made more than seven years before your death are usually exempt from inheritance tax. This makes timely and strategic gifting a valuable part of inheritance tax and gift tax UK planning.

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Types of Gifts and Their Tax Treatment

When it comes to inheritance tax gifts, understanding the different types helps you plan effectively.

Annual Exemption

You can gift up to £3,000 annually without inheritance tax. Unused allowance carries forward one year, allowing a combined £6,000 gift. This exemption helps reduce your estate’s taxable value through planned gifting.

Wedding Gifts

Gifts given for weddings are exempt from inheritance tax. You can gift £5,000 to your child, £2,500 to a grandchild, and £1,000 to others. These generous limits help in lawful estate reduction.

Small Gifts

Small gifts up to £250 per person each year are exempt if made to different recipients. This allowance lets you give modest amounts without impacting your inheritance tax threshold or estate’s taxable value.

Potentially Exempt Transfers (PETs)

Gifts made over seven years before death are usually exempt. If death occurs within seven years, tax may apply. PETs allow strategic gifting to reduce potential inheritance tax liabilities over time.

Regular Payments

Gifts regularly made from your income, as long as they don’t reduce your standard of living, are exempt. This enables ongoing support to loved ones without increasing your estate's inheritance tax burden.
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What are exempted gifts?

Exempted gifts are transfers you can make without any inheritance tax liability, within the UK tax year (6 April to 5 April). Staying within the annual allowance helps reduce your estate's taxable value.

For 2025, each individual can gift up to £3,000 annually without incurring inheritance tax. This allowance may be carried forward for one year if unused. Small gifts of up to £250 per person are also exempt, but cannot be combined with the annual exemption.

Couples can combine allowances, gifting up to £6,000 annually to their children without tax implications. Additional exemptions apply for maintenance payments to dependents.

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Gifts Exempt from Inheritance Tax

Certain gifts are exempt from inheritance tax and do not count towards your estate:

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  1. Wedding or Civil Ceremony Gifts

    • Up to £1,000 per person.

    • Up to £2,500 for a grandchild or great-grandchild.

    • Up to £5,000 for a child.

  2. Regular Gifts from Income

    • Must be made regularly (e.g., birthdays, Christmas, anniversaries).

    • Must come from post-tax income, not savings.

    • You must still be able to maintain your normal standard of living.

    • Can include:

    Maintenance for a spouse, civil partner, or ex-partner.

    • Maintenance for children under 18 or in full-time education.

    • Support for dependents such as relatives.

    • Life insurance premiums.

  3. Payments Towards Living Costs

    • For dependents such as an elderly relative or a child under 18.

Years Between Gift and Death Tax Paid
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 or more 0%
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How is inheritance tax calculated?

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Broadly speaking, taxation in the United Kingdom involves payment of tax to three different levels i.e. The Central Government (Her Majesty’s Revenue & Customs), Devolved Government and Local Government. Inheritance tax is paid to the Central Government i.e. to the HMRC.

2017/18 2016/17
Standard threshold £325,000 £325,000
Combined threshold maximum for married couples and civil partners £650,000 £650,00
Rate of tax on balance
Chargeable lifetime transfers Transfers on, or within 7 years of, death 20% *40% 20% *40%

Calculating inheritance tax (IHT) in the UK involves several steps, primarily centred around the value of your estate and any gifts made during your lifetime. Here’s how it works:

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  1. 1. Value Your Estate: Begin by adding up all your assets, including property, savings, and possessions. Subtract any debts owed to get the net value.
  2. 2. Apply the Nil-Rate Band: The nil-rate band is the threshold below which no IHT is charged. As of 2024, this threshold is £325,000. If your estate exceeds this amount, IHT is charged at 40% on the value above the threshold.
  3. 3. Consider Gifts: Gifts made within seven years of death may also be included in the estate's value for IHT calculations. However, you can utilise the annual exemption, allowing individuals to gift up to £3,000 per year without affecting the IHT calculation.
  4. 4. Calculate Taxable Estate: :
    • Total Estate Value: £375,000
    • Gifts within 7 years: £110,000 (e.g., £55,000 to two children)
    • Less Spousal Gifts: £100,000
    • Chargeable Estate: £385,000
    • IHT Threshold: £325,000
    • Taxable Amount: £60,000
    • IHT Due (40%): £24,000

By planning effectively and making use of allowances like the annual exemption, you can help reduce potential inheritance tax liabilities for your beneficiaries.

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Tax Implications of Gifting Property

When gifting property, consider inheritance tax gifts carefully. The tax is based on the property's market value at the time of the gift, even if sold below market price to a connected person such as family or trusts.

If the property has not been your main residence, Capital Gains Tax (CGT) may apply on the gain since purchase. The gain is calculated as the increase in value minus allowable expenses. For 2025, the CGT annual allowance is £11,000. Gains above this are taxed at 18% or 28%, depending on income tax bands.

Each person has a £3,000 annual exemption for gifts, which can be carried forward one year if unused. Gifts above this allowance may incur inheritance tax if you die within seven years of gifting, with taper relief reducing tax over time.

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Inheritance tax on gifts FAQ’s

Related to gifting money

You can give gift either by depositing it to the person’s bank account, by cheque or by transferring property.

You need not declare cash gifts to HMRC as far as it is within allowed limit i.e. within annual allowance of £3,000.

Yes, you can gift money in your will without paying any inheritance tax on it, Provided the value of your estate is not more than the allowed limit i.e. £325,000. In case the value of your estate is more than £325,000, then you have to pay the applicable tax on it.

Inheritance tax is the tax which is paid when a person dies and leaves property or possessions, also called as estate behind and it is applicable on the net value of the estate.

Yes you can send gift to your friend who stays in the United Kingdom even if you stay in a foreign country. However, please ensure that you are not sending any counterfeit or pirated goods.

Duty is paid on the gifts which are worth more than £135 if it is being sent from outside the European Union nations. However, exceptions apply to alcohol, tobacco products, perfume and toilet water for which there is separate duty free allowance. Duty will be waived off if the total due is less than £9.

There are certain items which you can bring on your own without paying any duty on it in case you want to gift it someone in UK, such as: tobacco products, 4 litres of still table wine, 16 litres of beer, gifts and souvenirs worth £390 etc.

In case the value of your gift is more than the duty free allowance i.e. £135, the recipient of the gift pays the duty once the goods arrive in the UK, however duty has to be paid before the gift is delivered to the recipient.

In this case, you can combine them in the same package without confusing the per person allowance and each gift must be individually wrapped, addressed to the specific person and listed on the customs declaration.

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