Rules and Rates Applicable to Gifts for Inheritance Tax Purposes

Where you have gifted in the seven years prior to your death, these gifts may be taxed or affect the inheritance tax due in your estate.

These gifts are called potentially exempt transfers (also known as PETs).

Gifts could be of money but also of personal items or property, or even if you were to sell something to someone for less than its true market value, anything which reduces the value of your assets.

The PET is the reduction in the value of your estate.

Gifts to spouses, civil partners and charities are exempt from inheritance tax, but gifts to others may come back into question to be assessed for inheritance tax unless any of the following allowances apply.

There are a number of gifting exemptions available which can assist with your inheritance tax liability, including:

• The Annual Allowance
• Small Gifts Allowance
• Gifts on Marriage or Civil Partnership
• Regular Gifts out of Income

Some of these allowances were set in the 1970s and early 1980s and have not been increased since.

However, despite the lack of their proportionate increase, they can still be useful mechanisms to help legitimately reduce the amount of inheritance tax payable in your estate.

You can gift up to £250 per person to as many people as you like, which will not affect your inheritance tax position.

(So long as you have not given any additional gifts to any of those recipients within the same tax year)  

This exemption can often be overlooked, but if you have income that is surplus to your requirements to meet the costs to maintain your usual standard of living and you are happy to commit to a regular gift, then this can be exempt from inheritance tax assessment.

To apply for this exemption, your Executors would need to give a full breakdown to the HMRC of your income and outgoings for any tax year in question.

It, therefore, can be useful to keep track of this information to assist in this process should it become relevant.

To meet the" regular" requirement, the payment doesn't have to be the same amount each month, for example, but it has to be more than a one-off payment.

We each have a nil rate band available of £325,000.

This means that on the first £325,000 of value assessed for inheritance tax in our estate, £0 of tax will be due.

If you give away assets exceeding £325,000 and then die within seven years, then tax may be due on those gifts, which, dependent on the wording of your Will, may be payable by the recipient of the gift.

This is not something that is always considered when making a large gift.  

Taper Relief can reduce the tax due on such gifts but does not reduce the amount taken into account. 

If a gift is given in the three years preceding your death, there will be no reduction of inheritance tax, but if you die between 3 to 7 years from the making of the gift, taper relief will apply to reduce the rate of tax payable as follows:

3 to 4 years - 32%

4 to 5 years - 24%

5 to 6 years - 16%

6 to 7 years - 8%

7 or more -0%