Inheritance tax (IHT) rules allow individuals to reduce their potential tax bill while still alive by gifting assets correctly. The average IHT bill is expected to rise by £34,000 next April, with HMRC charging a steep 40% on estates above the threshold. However, strategic gifting can exempt certain assets from this charge, lowering the overall taxable estate.
What Counts as a Gift for Inheritance Tax?
In IHT terms, a gift includes money, household goods, furniture, jewellery, houses, land, buildings, stocks and shares on the London Stock Exchange, and unlisted shares held for less than two years before death. Selling an asset for less than its market value also counts as a gift—for example, selling a home to a child at a discount. Birthday and Christmas gifts from regular income are usually exempt. Anything left in a will is not a gift but part of the estate, liable for IHT.
Key Rules for Effective Gifting
Gifts may be excluded from IHT depending on who receives them, their value, and when they were given. Incorrect gifting can still leave the assets counted for tax purposes.
Who You Give To
No IHT is due on gifts between spouses or civil partners living permanently in the UK, with no limit on value. Gifts to charities or political parties are also exempt. Wedding gifts are tax-free up to limits: £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for others.
When the Gift Was Given
The seven-year rule is crucial: gifts given seven or more years before death are exempt. If you die within seven years, taper relief applies on a sliding scale from 8% to 32% for gifts made 3-7 years before death. Gifts made within three years are taxed at the full 40% rate.
HMRC advises keeping records of all gifts, including recipient, value, and date, to simplify IHT calculations. Proper planning can significantly reduce the tax burden on your estate.
