Gifts and Inheritance Tax: What You Can Give Tax-Free

Many people want to help their children or grandchildren during their lifetime, but worry about the tax implications. Understanding the gift rules can help you give generously while minimising inheritance tax.

How Are Gifts Taxed?

In the UK, gifts are not subject to income tax or capital gains tax for the recipient. However, gifts can affect inheritance tax (IHT) in two ways:

• Immediately chargeable: Some gifts (mainly to certain trusts) may trigger an immediate 20% IHT charge if they exceed your nil rate band
• Potentially exempt: Most gifts are potentially exempt transfers (PETs)—they become fully exempt if you survive 7 years after making them

The key concept to understand is that gifts reduce your estate for IHT purposes, but only if you live long enough for them to become exempt.

The 7-Year Rule Explained

When you make a gift to an individual, it's called a potentially exempt transfer (PET). If you survive for 7 years after making the gift, it falls completely outside your estate and no IHT is payable.

What Happens If You Die Within 7 Years?

If you die within 7 years of making a gift that exceeds your available exemptions:

• The gift is added back to your estate for IHT calculation
• Tax may be due at 40% on the gift (or the portion exceeding your nil rate band)
• Taper relief reduces the tax if you survived at least 3 years

Taper Relief

Years between gift and death	Tax rate applied
0-3 years	40%
3-4 years	32%
4-5 years	24%
5-6 years	16%
6-7 years	8%
7+ years	0%

Important: Taper relief only reduces the tax rate—it doesn't reduce the value of the gift. If the gift doesn't use up any nil rate band, taper relief provides no benefit.

Gifts That Are Always Tax-Free

Certain gifts are immediately exempt from IHT, regardless of when you die. These include:

1. Annual Exemption (£3,000)

You can give away £3,000 per tax year completely free of IHT. If you didn't use last year's exemption, you can carry it forward for one year only, giving you £6,000 to use.

Tip: Use your annual exemption every year. It's a "use it or lose it" allowance that provides certainty rather than waiting 7 years.

2. Small Gifts (£250 per person)

You can make gifts of up to £250 to any number of people each year. You cannot combine this with the annual exemption for the same person.

3. Wedding or Civil Partnership Gifts

Special exemptions apply for gifts on marriage or civil partnership:

• Parents can give up to £5,000
• Grandparents and great-grandparents can give up to £2,500
• Anyone else can give up to £1,000

4. Gifts to Spouses and Civil Partners

Unlimited gifts between UK-domiciled spouses or civil partners are completely exempt from IHT. This is one of the most valuable exemptions in the tax system.

5. Gifts to Charities

Gifts to qualifying charities, political parties, and national institutions are fully exempt, both during lifetime and on death.

6. Gifts for Maintenance

Certain gifts for family maintenance are exempt:

• Gifts to support a spouse or civil partner
• Gifts to support children under 18 or in full-time education
• Gifts to support elderly or infirm relatives who depend on you

Normal Expenditure Out of Income

One of the most powerful but underused exemptions is gifts made as "normal expenditure out of income." This allows unlimited tax-free giving if you meet three conditions:

1. The gifts form part of your normal expenditure (regular and habitual)
2. They are made from income, not capital
3. After making the gifts, you have enough income to maintain your usual standard of living

Examples that may qualify:

• Regular payments into a child's savings account
• Monthly contributions to grandchildren's school fees
• Annual premium payments on a life insurance policy for someone else
• Regular gifts to help adult children with their mortgage

Keeping detailed records is essential to prove this exemption applies.

Gifts With Reservation of Benefit

A gift only works for IHT purposes if you truly give away the asset. If you continue to benefit from something you've "given away," it's a gift with reservation of benefit (GROB) and remains in your estate.

Common Examples

• Giving away your home but continuing to live there rent-free - The property stays in your estate
• Giving cash but expecting it back if you need it - Not a valid gift
• Giving a painting but keeping it on your wall - Remains in your estate

How to Make Valid Gifts

To avoid gift with reservation rules:

• Give away assets completely without strings attached
• If giving property, move out or pay full market rent
• Don't put conditions on how the recipient uses the gift

Practical Gift-Giving Strategies

Strategy 1: Regular Annual Giving

Make full use of annual exemptions every year:

• Use your £3,000 annual exemption
• Give £250 small gifts to friends and extended family
• Pay grandchildren's school fees from income if affordable

Strategy 2: Large Gifts Early

If you have substantial assets, consider making larger gifts while you're healthy:

• The earlier you give, the more likely you'll survive 7 years
• But don't give away money you might need
• Consider your own care needs in later life

Strategy 3: Life Insurance to Cover the Risk

If making large gifts, you could take out decreasing term life insurance to cover the potential IHT bill if you die within 7 years. The policy should be written in trust so it doesn't add to your estate.

Keeping Records

Proper records are essential. For each gift, document:

• Date of the gift
• Description and value of what was given
• Name and address of recipient
• Any exemption claimed (annual, small gift, wedding, etc.)

Keep these records with your will. Your executors will need them to complete the IHT return.

Common Questions About Gifting

Can I Give My House to My Children?

You can, but be very careful. If you continue to live in it, it's a gift with reservation and stays in your estate. You'd need to either move out or pay full market rent to your children.

Can I Help With a House Deposit?

Yes, giving cash for a house deposit is a straightforward gift. If it's above your annual exemption, it becomes a potentially exempt transfer subject to the 7-year rule.

Should I Tell My Executors About Gifts?

Absolutely. Your executors must declare gifts made in the 7 years before death on the IHT return. Keep clear records and let your family know where to find them.

When to Seek Professional Advice

Consider speaking to an estate planner if:

• Your estate is likely to exceed the IHT threshold
• You want to give away large sums or property
• You're considering gifts into trust
• You have complex family circumstances
• You're not sure if your gifts qualify for exemptions

The right advice can help you give effectively while protecting yourself and your family.