A common question we are asked at TWP relates to Inheritance Tax (IHT), and more specifically how IHT impacts gifts given by a deceased individual.  

When it comes to gifting and IHT, there are several important things to consider: 

• The seven-year rule
• What gifts IHT is paid on
• How IHT on gifts is paid
• Exemptions and allowances

The implications of IHT on gifts can be numerous and often complex, so it is best that you understand how IHT can affect you, be it with gifts you have received from a deceased individual, or if you want to give someone a gift yourself.  

Please read our article below for an in-depth guide to IHT and its impact on gifts.  

Inheritance Tax and gifting, everything you need to know.  

While most people will commonly associate Inheritance Tax (IHT) with a tax on the property, money, and possessions of an individual who has passed away, it is important to consider and understand the IHT implications on any gifts that have been made by a deceased individual.  

The seven-year rule 

In most circumstances, if you have received a cash gift from somebody and more than seven years have passed since the date of the gift being given and the individual’s death, then no tax needs to be paid. 

However, if the time span is less than seven years, then IHT needs to be considered. 

This seven-year rule works on a sliding scale known as taper relief. This means that the amount of tax paid on a gift reduces each year following the gift until it reaches zero after seven years. 

Here is a full breakdown of this relief:  

Years between gift and death	Rate of tax on the gift
3 to 4 years	32 per cent
4 to 5 years	24 per cent
5 to 6 years	16 per cent
6 to 7 years	8 per cent
7 or more	0 per cent

 

How IHT on gifts is paid 

IHT due on gifts is usually paid by the Estate, however, if the value of these gifts exceeds £325,000 within seven years of the individual’s death, then the recipient of the gift will need to pay the IHT. 

What gifts do I pay IHT on? 

According to the GOV.UK website, gifts that are liable to IHT are the following: 

• Money 
• Household and personal goods such as furniture, jewellery, or antiques 
• A house, land, or buildings 
• Stocks and shares listed on the London Stock Exchange 
• Unlisted shared held for less than two years before the individual died 

Are any gifts exempt from IHT? 

IHT does not need to be paid on gifts between spouses and civil partners in most cases (restrictions can be relevant when gifting to a non-UK domiciled spouse). They can be gifted as much as they like, so long as they reside in the UK permanently and are legally married or in a civil partnership with the individual.  

Additionally, IHT does not impact birthday or Christmas gifts from your regular income. Donations to charities, political parties, and housing associations are also free of tax.  

Annual exemptions 

Annual exemptions are in place to allow individuals to give away money or possessions that are free of IHT. The total value of this annual exemption is £3,000 and can be gifted to one person or split between several people.  

Any unused annual exemption can be carried forward to the following tax year, however, this is a one-time allowance and cannot be carried forward to the tax year after this.  

Small gift allowance 

You can make small gifts up to the value of £250 to as many individuals as you like in any tax year, provided you have not already gifted the same person under another allowance.  

You also cannot give a larger gift to an individual and claim the small gift exemption for the same person in the same year.  

Gifts for weddings and civil partnerships 

There are also IHT allowances on gifts for those who are getting married or entering a civil partnership. This allowance can be combined with other allowances, except for the small gift allowance.  

The value of these gift allowances varies depending on the individual you are gifting. It is £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for any other individual.  

As you can see, the rules regarding Inheritance Tax on gifts are complex and varied, so it is best to speak to a professional if you have any queries or concerns.  

Our expert team at TWP has many years of experience in the field of IHT and is best placed to give you the advice and support you need. For further information, please contact us.