How to give without charges: Inheritance tax rules simply explained

Gift giving is a Christmas tradition that everyone loves, whether a shopping voucher or a car, it always adds a bit of extra cheer to the holiday. However, for people who like to splash out on their gifts, inheritance tax can put a dampener on things. Matt Parr, Legal Director at Shakespeare Martineau in Milton Keynes explains.
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Published 27th Oct 2021, 07:16 BST
Updated 27th Oct 2021, 07:33 BST
Don’t let Inheritance Tax spoil your gift giving: The rules simply explainedDon’t let Inheritance Tax spoil your gift giving: The rules simply explained
Don’t let Inheritance Tax spoil your gift giving: The rules simply explained

What is inheritance tax?

Quite simply, it is a tax on a person’s assets when they die. It can also be payable by the recipient of the gift depending on the value of it and the value of other gifts made by the giver within seven years of the giver’s death. The gift does not have to be monetary; it could also be property or possessions.

What’s the limit?

Matt ParrMatt Parr
Matt Parr

Per tax year, a person is able to give away a cumulative total of £3,000 to whoever they choose. They can also give as many small gifts under £250 to as many different people as they like.

What’s the seven-year-rule?

The seven-year-rule becomes relevant when a person gives away over £3,000 in one tax year. It states that the giver must survive for seven years after the gift for it to be exempt from inheritance tax. If not, the value of the gift is counted back into their estate when calculating the inheritance tax due. Such gifts will reduce the tax-free allowance (nil rate band) available on their death and, if the value of the gifts exceed this, the recipient or recipients are liable to pay the inheritance tax attributable to the gift or gifts they received. However, the tax payable does start to taper if it has been more than three years since the date of the gift.

Are there any gifts that are exempt?

Donations to charity and some gifts for marriages or civil partnerships are not liable for inheritance tax, depending on how closely related a person is to the happy couple. All gifts between married couples or those in civil partners are also exempt.

Is there a way to avoid inheritance tax for certain?

Unfortunately, unless a person is psychic, there is no sure-fire way to avoid inheritance tax on gifts over £3,000.

Nevertheless, there is the option of using ‘excess income’. If a person can prove their income meets all their living costs, and that their standard of living can be maintained after the gift, then it may be possible to claim an exemption for inheritance tax. However, to qualify, there must be a regular pattern to this gifting.

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