Inheritance tax and gifts

This is a basic outline of the rules relating to inheritance tax and gifts made during a person’s lifetime. The rules may differ in certain situations, such as where gifts are made into a trust.

When a person’s estate is valued to calculate whether inheritance tax is due, any gifts that the deceased person made in the 7 years immediately prior to their death are also taken into account. The value of these gifts will use up part of the nil rate band, and will reduce the tax free amount that is available. For more details about inheritance tax, it may be helpful to have read our associated article regarding inheritance tax.

Gifts can include a parent giving a property away to their child or transferring a property at an undervalue.

Making gifts during your lifetime can be a useful tax planning tool. As explained above, if you make a gift and then survive for 7 years, the gift is not included in your estate for tax purposes when you die. In this way, you can pass your assets to your family or friends without incurring any inheritance tax liability.

There are a number of exceptions to the general rule that gifts made during a person’s lifetime will use up their nil rate band (the tax free amount), including the following:

• Gifts between spouses or civil partners are exempt
• A person can give gifts up to a total of £3,000 each year without the gift(s) using the nil rate band. This can be carried over to the following year, to a maximum of £6,000
• Gifts of less than £250 do not count at all
• Wedding gifts are exempt, and the amount that you can give depends on your relationship with the recipient. You can give up to £5,000 to your child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else 
• Gifts from income
• Gifts to certain people to help with living costs
• Gifts to charities or some political parties

If the whole of the nil rate band has been used up and inheritance tax is payable, the rate of tax is reduced for gifts made between 3 and 7 years before the person died. This is known as ‘taper relief’.

It should be noted that there are rules to prevent people from obtaining the inheritance tax advantages described above, in situations where a gift is made but the donor of the gift retains an interest or benefit from the property. An example would be where a mother gives her house to her children, but continues to live in it. These are called the ‘reservation of benefit’ rules. The rules do not apply in every situation, and care should be taken when making lifetime gifts.

Please contact Alex Deller-Rust or Josie Birnie if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.