Inheritance Tax: Gifts, Exemptions and Reliefs
Inheritance Tax exemptions
Besides the emotional reward, gifting money or property to family members during your lifetime has many benefits, from relieving yourself of property maintenance to potential inheritance tax (IHT) reliefs or even exemptions.
Here, we will answer your questions about inheritance tax on gifts, including exemptions and reliefs.
Lifetime gifts in the UK
Lifetime gifts are when an individual’s cash or assets are given away during their lifetime, reducing the size of their estate. They are a tax-efficient way of giving away wealth, as they are less likely to be subject to IHT.
What is considered a lifetime gift?
A gift can take many forms, including:
- Monetary gifts – cash and bank transfers.
- Real estate – a house, building or land.
- Personal belongings or household goods – pets, clothing, jewellery, appliances, furniture, clothes and anything used in the place of residence.
- Stocks and shares in businesses listed on the London Stock Exchange.
- Unlisted shares held for under two years before passing away.
What is the inheritance tax gift allowance?
Also referred to as the inheritance tax annual exemption, the gift allowance enables an individual to give gifts worth up to £3,000 within a tax year without an IHT liability.
What can you gift a spouse or civil partner?
If you both live in the UK, you can gift as much as you please to your spouse or civil partner. There is no inheritance tax on gifts of cash, but they may have to pay capital gains tax on property or shares in a business.
What can you give your children?
From household and personal goods to property and stocks, you can give as much as you want to your children. However, IHT will be due on anything over the value of £3,000 unless you pass away at least seven years later. This is because it would qualify as a potentially exempt transfer (PET).
Gifts given in the three years before death are taxed at 40%, with taper relief decreasing that rate each year until the 0% rate after seven years.
What can you give your grandchildren?
Similarly, gifts to grandchildren are only IHT-free if you pass away at least seven years later.
What is a potentially exempt transfer?
A potentially exempt transfer allows you to give gifts that could become IHT-exempt after your passing.
What are the potentially exempt transfer rules?
A gift of any value to a family member, friend or other individuals will be IHT-exempt if the following criteria are met:
- You survive seven years after the transfer, known as the seven-year rule
- The transfer is made from one individual to another, not to a business
- You discontinue using the asset after gifting it and do not benefit from it in any way
Inheritance tax and gifts
Who pays inheritance tax on gifts?
The recipient of the gift will pay the IHT where it applies. Depending on your relationship with the beneficiary, you might wish to work out the IHT due on a gift beforehand.
What is the nil rate band and how much is it?
The nil rate band (NRB) is the threshold above which IHT is payable. That figure is fixed at £325,000 until March 2026. If anything was given away outside of the inheritance tax gift allowance in the seven years before death, it will count towards the nil rate band.
What is the residence nil rate band and how much is it?
To protect family homes from IHT, the Government introduced an additional threshold known as the residence nil rate band (RNRB) in 2017. This applies if the family home is passed down to direct descendants.
In 2021, the Government announced that the RNRB will be maintained at £175,000 until 2026.
What if you wish to transfer home ownership during your lifetime?
If you move out upon giving away your home and live for seven years, inheritance tax would not be applicable. However, if you pass away before the seven years pass, your home will be deemed a taxable gift.
What if you live abroad?
Gifts from individuals qualifying as permanent residents of a foreign country do not subject recipients to IHT.
If a person living abroad has assets in the UK, inheritance tax on gifting will only apply to UK assets. In this case, the seven-year rule would be valid.
Inheritance tax exemptions
When it comes to gifts, what is exempt from inheritance tax?
Gifts exempt from inheritance tax include:
- Anything given to a spouse or civil partner.
- Gifts of up to £3,000 within any tax year.
- Potentially exempt transfers – provided the benefactor lives at least seven years after the transfer.
- Gifts to exempt organisations, including housing associations and charities that meet specified criteria.
- Gifts of up to £250 to several individuals – provided none of the recipients received £3,000 from the benefactor during the same tax year.
- Gifts paid from your regular monthly income – as long as the benefactor meets their typical living costs.
- Wedding and civil partnership gifts.
Are gifts to charity exempt from inheritance tax?
A good way to reduce inheritance tax is through gifts to charity. If an individual’s assets exceed the nil rate band, donating at least 10% of your net estate to charity would reduce the 40% IHT rate to 36%. In addition, gifts to charitable organisations are IHT-free – whether the donation was made during the individual’s lifetime or after their death (through their will).
Charity exemption from inheritance tax applies only to qualifying UK-registered organisations, and the donation can be in the form of:
- A financial gift.
- A specific item.
- Whatever remains after the other gifts have been distributed.
Is there an inheritance tax on wedding gifts?
The value of a non-taxable wedding or civil partnership gift depends on your relationship with the recipient. The maximum amounts you can gift tax-free are as follows:
- Each parent (or step-parent) can gift £5,000 to a child.
- A grandparent or great-grandparent can give £2,500.
- £1,000 can be gifted to any other person.
If you wish to give a more generous gift, you can combine it with your annual IHT gift allowance of £3,000, which you can also split between several recipients.
Are ISAs exempt from inheritance tax?
Individual savings accounts, or ISAs, are not exempt from inheritance tax. However, if transferred upon death to a spouse or civil partner, inheritance tax spouse exemption would apply.
Are cars exempt from inheritance tax?
If a car can be classified as a national heritage asset, it will be exempt from IHT. Conditions include:
- Keeping the car in the UK.
- Making it reasonably available for public viewing.
- Properly maintaining the car.
However, if the car does not qualify as a heritage asset, it would be considered part of your net estate and, therefore, subject to IHT. If you give the car to a spouse or civil partner, it would be exempt from IHT.
Are funeral costs exempt from inheritance tax?
Reasonable funeral expenses, including flowers, a headstone and crematorium fees, can be deducted for inheritance tax purposes.
Are pensions exempt from inheritance tax?
Unless transferred outside your estate, assets in your pension pot will be subject to inheritance tax. This means they will be considered part of your net estate for IHT purposes.
Are premium bonds exempt from inheritance tax?
Are trusts exempt from inheritance tax?
Assets transferred into a trust during a person’s life are not subject to IHT. This reduces the inheritance tax on an estate to 20% if the owner survives for seven years following the transaction.
Is the family home exempt from inheritance tax?
If the family home is passed on to the surviving spouse, it won’t be subject to IHT. However, if the house is left to another person, it would count towards the net estate and be subject to IHT.