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Inheritance tax: a six point guide to gift allowances

Financial planner Saran Allott-Davey explains the inheritance tax gift rules.


Financial planner Saran Allott-Davey explains the inheritance tax gift rules. Click here to read how to avoid the tax toll by giving gifts out of income.

Under current Inland Revenue rules it is possible for you to make a gift of any amount of money or assets to an individual or series of individuals without any immediate tax consequences, but there may be Inheritance Tax consequences.  The following is a brief summary of the current gifting rules:

1. Annual Gifting Allowance of £3,000

It is possible to make total gifts of up to £3,000 per annum from your capital and this amount will be immediately outside of your estate for inheritance tax purposes regardless of how long you live after making the gift.  The gift can be to one or any number of persons. You can carry forward any unused part of the £3,000 exemption to the following year, but if you don’t use it in that year, the carry forward exemption expires.

2. Gifts of £250

In addition to the £3,000 total gift allowance, it is possible to make a gift of up to £250 in total to any number of people and as long as their individual gift does not exceed £250 in any one year then this amount will also be immediately out of your estate for inheritance tax purposes.

3. Gifts in Consideration of marriage or civil partnership

  • First £5,000 of a gift by a parent of either part of the marriage is exempt.
  • First £2,500 of a gift by any other ancestor such as a grandparent is exempt.
  • First £2,500 of a gift (prior to marriage) by one party of the marriage to the other is exempt.
  • First £1,000 of a gift by anyone else, whether or not a member of the family is exempt.
  • Must be made in contemplation of a particular marriage and, in practice, on the occasion of the marriage.
  • Must normally be an outright gift to a trust where beneficiaries are limited to the happy couple and their children and children’s spouses.
  • Must be applied before the annual exemption.

4. Regular Gifts out of Income

In addition to the above it is possible to give away all of your excess income each year and for this to be immediately outside of your estate for IHT purposes. The key points are that the gifts must be regular and must be affordable from Income.

Read the separate guide to giving gifts out of income here.

5. Charitable Gifts

Payments to registered charities are outside of your estate immediately during your lifetime and on death.

6. Potentially Exempt Transfers

Any gift which does not fall immediately outside of your estate by virtue of the above allowances may be deemed a potentially exempt transfer. The gift will be exempt if you survive seven years from the date of making it and providing you do not reserve any benefit in the gifted property.

The recipient of any gift from yourself will not be liable for tax on that gift, however in the event of your death within seven years of making the gift it is possible that your remaining estate on death may need to pay some additional tax because of the gift.  It is therefore important for you to keep a clear detailed record of the amount of a gift made, the date and to whom it was paid.  This will allow your Executors to deal correctly with your estate and to meet any inheritance tax liability from your residual estate

I mentioned the difference between types of gifts just so that from your own estate planning point of view you understand the tax implications, however, as mentioned previously the recipient of the gift does not need to know in which category the gift falls it will in any event be tax free in their hands and does not need to be declared on a self assessment tax return. 

This note is for general guidance only and the rules are all subject to change and certain conditions apply. Any gifts made must be permanent and allow you no benefit so it is essential to be confident that you can afford to make such gifts and that your own long term needs have been fully considered.

Saran Allott-Davey is a financial planner with Heron House Financial Management, recently named as the top independent financial advisers in Wales,

3 comments so far. Why not have your say?

Ettore Romei

Mar 22, 2010 at 17:52

Must be a quiet day at Citywire Towers....!

Perhaps CW should put these types of articles on hold until after Darlings has plugged all the loopholes in the coming weeks!

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Mike Reynolds

Apr 14, 2010 at 14:50

Hi, myself and my wife are each about to provide a significant gift to our son as a part deposit on a house. This gift will take the form of a PET. Is there specific wording that needs to be drawn up between the parties in order to satisfy any future scrutiny by HMRC in the event of either myself or my wife not surviving the required 7 years?

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Clive Liddle

Sep 27, 2013 at 08:49

I intend to sell my house in the near future and to make significant gifts to my 2 daughters, using the 7 year rule how much can I give them and be exempt from income tax?

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