How does gifting impact Inheritance Tax?

When someone dies, calculating Inheritance Tax (IHT) is more than just valuing their assets and debts. One crucial step is looking at any gifts they gave away during their lifetime. This review helps you check whether any exemptions or reliefs apply to those gifts. These can reduce how much tax is owed. 

Do gifts need to be declared?

If you’re handling someone’s estate, you might wonder whether you need to declare any gifts they made. In short, if the person lived for seven years after giving a gift, that gift is usually outside their estate for IHT purposes. This is called the seven-year rule. 

Gifting and inheritance - understanding the seven-year rule 

Some gifts are automatically exempt from Inheritance Tax. Others fall into two categories: 

• Potentially Exempt Transfers (PETs);
• Chargeable Lifetime Transfers (CLTs). 

If the person lived for seven years after making the gift, it won’t count towards the value of their estate. That means no tax is due on it. But if they pass away within seven years, things can get a bit more complex. 

 If the total gifts are under the Nil Rate Band (currently £325,000), no tax is due. But if the gifts go over that amount, and the person dies between three and seven years later, a tax discount called Taper Relief may apply. This can reduce how much tax is owed. 

CLTs vs PETs: What’s the difference?

If a gift isn’t automatically exempt, it will be either a CLT or a PET. 

• CLT: This applies to gifts into things such as a Discretionary Trust. These may face a 20% tax charge straight away (or 25% if the tax is paid by the person giving the gift).
• PET: These are gifts to individuals, not businesses or Trusts. If the person lives for seven years after giving the gift, it’s tax-free. 

Exemptions and reliefs 

• Annual exemption: You can give away up to £3,000 each tax year without it being taxed. If you didn’t use the allowance last year, you can carry it over, too.
• Small gifts exemption: You can give up to £250 to any number of people each year. For example, giving £250 to 275 people would still be covered by this rule.
• Marriage or Civil partnership gifts: Gifts made on or shortly before a marriage or civil partnership are exempt up to specific limits:
  • £1,000 to anyone;
  • £2,500 to a grandchild;
  • £5,000 to a child.

• Maintenance payments: Payments to support a spouse, child, or dependent relative are usually exempt. For example, if someone paid care home fees for a dependent parent, these payments wouldn't be taxed. 

Gifts out of income 

Some people give regular gifts from their income, not their savings. These can also be exempt from IHT, but only if:  

• The gift came from a regular income.
• It didn’t affect their standard of living.
• It was part of their normal spending. 

To qualify for this relief, it's important to keep clear records showing how much income was earned and how much was gifted. 

Additional insights on gifting and IHT 

• Business Property Relief (BPR):  This offers up to 100% tax relief on qualifying business assets (up to £1 million from April 2026, and 50% after that).
• Agricultural Property Relief (APR): This works similarly to BPR but applies to farmland or agricultural buildings.
• Trusts: Trusts can help manage and pass on wealth. Different types of Trusts, such as Bare Trusts or Discretionary Trusts, offer different tax advantages.

Record keeping 

Keeping a record of any gifts made is essential. This helps your Executors when it's time to report the gifts to HMRC during the estate administration process. 

Understanding the rules around gifting and inheritance can help reduce the amount of Inheritance Tax due on your estate. Making use of available exemptions, planning, and keeping good records can all make a big difference.