Gifting and inheritance tax: Explained

With Chrismas only a few short weeks away, the giving and receiving of gifts will be high on everyone’s agenda. As part of your inheritance tax planning, you may consider gifting money or property to family or friends, but what should you be aware of?

In this article, we give a brief overview of gifting and inheritance tax, including who you can gift to, how much you can gift, and what it means if you continue to benefit from the gift.

Giving away money or property to avoid inheritance tax 
One of the easiest ways to mitigate your inheritance tax liability is to gift money (or property) to friends, family, or charity while you are still living. There are some gifts you can give in your lifetime which will not incur tax after your death, including gifts to your spouse or civil partner. If you make a gift seven years before your death, it will usually be excluded from the value of your estate for inheritance tax purposes. Gifting can be a complex area, so you should speak to a solicitor about gifts as part of your estate planning process.

Who can I give gifts to and how will this impact the inheritance tax position of my estate?
Gifts to your spouse or civil partner are usually tax-free, however, this does not apply to unmarried partners or cohabitants. If you wish to leave gifts to an unmarried partner or cohabitant, other family members or friends, you should seek estate planning advice to determine the most tax-efficient way to do this.

Annual Exempt Allowance
Each individual is allowed to give away up to £3,000 in any one tax year. You can carry forward your exemption amount for up to one year. So, for example, if you do not use any of your allowance in 2021, you can gift up to £6,000 in 2022.

Small gifts 
You can give small gifts of up to £250 per person, such as for birthdays or Christmas presents, unless another exemption has been used for the same person.

Wedding gifts 
There is also an exemption for wedding gifts, with how much you can gift dependent on your relation to the couple getting married. If you are a parent, you can gift up to £5,000, if you are a grandparent or great-grandparent you can gift up to £2,500, and for everyone else, the exemption threshold is £1,000.

Potentially Exempt Transfers
Outright gifts that exceed any of the above allowances are known as potentially exempt transfers. If you die within 7 years of making the gift, the gift will be brought back into your estate for inheritance tax purposes. This will reduce, or use up, your nil rate band allowance (the nil rate band is the amount each individual can leave without incurring inheritance tax).

Retained benefit 
You must be aware of the consequences of making a gift which you will still benefit from during your lifetime. The most common example is where a parent gifts their home to their child but continues to live in the property rent-free until they die. When this is the case, the property will still form part of the estate in the event of death, regardless of whether seven years have passed since the date of the initial gift.

If you would like a free initial consultation with one of our specialist Wills, Trusts & Estates team, contact us on 01244 356 789 or email info@cullimoredutton.co.uk.

Please note: This is not legal advice; it is intended to provide information of general interest about current legal issues.