What is meant by a Gift?
It is not as simple as saying that all gifts do not require paying Inheritance tax as there are many issues which will need to be evaluated first.
Gifts before I die
Any gifts that you make to any individuals will be exempt from Inheritance Tax payments if you live for a total of seven years or more after having made the gift.
These kinds of gifts are usually known as Potentially Exempt Transfers (PETs).
Often if you give away an asset but keep an interest in it – an example of this is giving your house away but continuing to live in it rent free – this gift will not fall within the category of a potentially exempt transfer.
If you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on the value of the gift. This will have to be paid either by the person in receipt of the gift or by the representatives of the estate.
If you die between three and seven years after making a gift, and the total value of the gifts you made is totalled as above the Inheritance Tax threshold then any Inheritance Tax due on the gift will be reduced on a sliding scale. This process is known as Taper Relief.
Are there any gifts that will be exempt from Inheritance Tax regardless of when the gift is given?
You are able to make gifts to certain people and certain organisations without the need to pay any Inheritance Tax on these gifts. It is irrelevant whether you make this gift during your lifetime or as part of your will.
- Gifts to husbands, wives or civil partners are exempt only in the case where that person has a permanent home in the United Kingdom are exempt from Inheritance Tax
- Gifts to United Kingdom Charities are exempt from Inheritance Tax
- Gifts to certain national institutions such as museums, universities and the National Trust are exempt from Inheritance Tax
- Gifts to any elected United Kingdom political party. However, to be regarded as a political party they must have at least two members elected to the House of Commons or have one elected member but have received at least 150,000 votes
What about gifts to my partner if we are not married?
If you make gifts to your partner who you are not married to or not in a registered civil partnership they will not be exempt and will require Inheritance Tax to be paid on them.
During your lifetime you may make gifts of up to £3,000 each tax year. These gifts will thus be exempt from paying Inheritance Tax when you die.
If you do not use the entire amount in one year then you will be able to carry forward this amount into the next year, but this has to be used in that year otherwise it is lost. You cannot use money from the next year before it has arrived however.
Certain gifts that you make during your lifetime are exempt for the purposes of Inheritance Tax due to the type of gift or the reason for making the gift and fall into the following three categories:
- Wedding / civil partnership ceremony gifts
- Small gifts
- Regular gifts or payments
Wedding / Civil Partnership ceremony gifts
Gifts given for a wedding or a civil partnership ceremony will be exempt from Inheritance Tax. This exemption is however subject to certain qualifications:
- Parents can each give cash or a gift equivalent to £5,000
- Each of the grandparents can give cash or a gift equivalent to £2,500
- Any other person can give cash or a gift equivalent to £1,000
- The gift must be given or the promise to make the gift must be made on or shortly before the date of the wedding or civil partnership ceremony.
Qualification to the Exemption
If the wedding or ceremony is cancelled and you still make the gift this exemption will not apply.
If you make the gift after the wedding or ceremony and you have not promised it first then this exemption will not apply.
You can make gifts up to the value of £250 to as many people as you like in any one tax year. If you give a gift for a larger sum you cannot claim the exemption for the first £250 of that gift. The exemption is calculated according to the total value of the gift given or the total amount of cash given for a cash gift.
Any regular gifts that you make out of your normal after-tax income will be exempt from Inheritance Tax. However, these gifts will only qualify if after having made them you have enough income left to maintain your normal lifestyle.
The following are examples of this kind of gift:
- Monthly or other regular payments to an individual
- Regular gifts for people’s birthdays and for Christmas or for wedding or civil partnership anniversaries
- Regular premiums on a life insurance policy whether this is for you or for someone else
- Regular maintenance payments to:
- Your husband, wife or civil partner (cannot simply be a partner)
- Your ex-spouse or formal civil partner
- Dependants such as relatives who are dependent on you due to old age
- Your children. This definition of children includes adopted children and step-children. They must however be under the age of 18 or otherwise in full-time education
Gifts into Trusts
Gifts that are made into trusts are not usually exempt from the need to pay Inheritance Tax.
Who does the Inheritance Tax become payable to?
The Government Body which deals with Inheritance Tax payments is HM Revenue and Customs, being part of the Home Office.
What do HM Revenue & Customs need to be aware of in relation to gifts?
You should contact HM Revenue & Customs in relation to gifts – other than gifts which are exempt if you have done one of the following things:
- Made a gift to a company or a discretionary trust. An immediate charge on this will arise and you must provide information to HM Revenue & Customs within one year of making the gift
- Received an outright gift from someone and they have died within seven years of making the gift. You must provide the information to HM Revenue and Customs within one year of the death
- Received a gift with the reservation of benefit from someone and they die after making the gift. You must provide the information to HM Revenue and Customs within one year of the death