Do I have to pay inheritance tax on gifts?

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When thinking of gifting someone something special we do not always think about the tax implications. Are you aware that there are limits on tax free inheritance gifts in the UK?

So, you may ask the question, how much can my gift be worth before I am faced with a tax implication? 

You can give away £3,000 worth of gifts each year without them being added to the value of your estate. This is known as your ‘annual exemption’. You can carry any unused annual exemption onto the next year, but this is limited to one year only. 

What is the limit on inheritance gifts before tax? 

There is no inheritance tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime as long as they are permanent UK residents. However, people you give gifts to will be charged an inheritance tax when you decide to give something away which is worth more than £325,000 in the 7 years before your death. 

So what exactly counts as a gift? 

A gift can be anything that has value for example money, possessions or a property. Not many people know this but when you transfer something to someone for example a property to your child, but you sell the property for less than the market value, the difference in value is considered a gift. 

What gifts are exempted?

You can give away £3,000 worth of gifts each tax year which is the 6th April to 5th April every year, without them being added to the value of your estate. This is your annual exemption. There are also other gifts that you can give away, such as: 

  • Payments to help with another persons living costs 
  • Gifts to charities 
  • Christmas gifts 
  • Wedding or civil ceremony gifts with a worth of up to £1,000 per person, £2,500 for both a grandchild and great grandchild and £5,000 for a child. 

TIP!: You can use more than one of the above categories for one person. For example, you can gift your child £5,000, whilst also gifting them christmas gifts and payments to help with their living costs, all with a tax exemption. 

So what is the 7 year rule?

The 7 year rule is that if there is inheritance tax to pay, this is charged at a rate of 40% on gifts given in the 3 years before you die. Whereas gifts made 3-7 years before your death are taxed on a scale known as a ‘taper relief’. The current rates are explained in the table below. 

Number of years between gift and death Percentage of tax paid 
Less than 3 years 40%
3 – 4 years32%
4 – 5 years 24%
5 – 6 years 16%
6 – 7 years 8%
7 or more years 0%

Example: Zara died and left 3 gifts in the 7 years before her death:

  • £300,000 to her sister 6.5 years before her death
  • £50,000 to her brother 4.5 years before her death 
  • £150,000 to her cousin 3.5 years before her death

Zara is not entitled to any other gift exemptions or reliefs. Zara uses the £300,000 to gift her sister, and this is therefore tax free, the remaining amount is used up by her brother and cousin, this means that there is tax to pay on the £25,000 of the gift that Zara has given to her brother at the rate of 24%. Whilst the gift of £150,000 to her cousin is also valued at a rate of 32%. 

Zara’s remaining estate was then valued at £500,000 and was charged at a rate of 40% inheritance tax, as she used up her tax free amount on gifts before her death. 

TIP!: There is a £325,000 inheritance tax threshold. Anything below this amount is tax free!

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