Inheritance tax planning and tax free gifts

Matthew Ridyard

12 December 2022

Giving money away to avoid inheritance tax

If your estate is worth more than £325,000 (or £650,000 for married couples and civil partners), some of it may be taxed by HMRC when you die. 

Giving away assets while you are still living is one of the simplest methods to avoid inheritance tax. 

You can give some of your money away each year without incurring any tax liability after your death. This includes presents to your spouse or civil partner, as well as donations to charities.

It generally covers gifts made to people more than seven years before your death. If you make a gift within seven years after your death, it is usually included in your estate for inheritance tax reasons. 

If you place your money in a trust or pass on ownership or shares in a firm, you may also have to pay inheritance tax (although you may be able to get business relief - which is explained further on gov.uk).

Tax free gifts by value

The list below highlights some of the most important aspects of making tax-free donations. However, because this may be a challenging topic, you should get expert guidance on your unique circumstances. At Simpwill our experts would be more than happy to help, head over to live chat now with your questions.

• £0 - The amount of tax due on gifts to your spouse or civil partner

• Seven - Number of years you have between gifting something to an individual that isn't your spouse and your death to ensure it's tax-free

• £3,000 - The total amount you can gift tax-free in a tax year (your 'annual exemption')

• £250 - Maximum amount you can gift tax-free to an individual that hasn't benefited from your annual exemption each year

• £0 - Amount of tax due on gifts given for maintenance of old or infirm relatives

• 18 - The age up to which you can gift your children with maintenance for their education or training tax-free

• £5,000 - The amount a parent can gift their child tax-free for their wedding

• £0 - Amount of tax due on gifts to charities or political parties.

Who can i give money too as a gift, tax free

Gifts for your civil partner of spouse  

These kind of donations are usually tax-free. This excludes unmarried partners. More information may be found in our guide on inheritance tax for married couples and civil partners.

Gifts to other individuals and your family 

If you want to leave money to other family members, such as your children, you should arrange ahead of time. 

Some gifts are better given while you are still living than left in your will. The majority of contributions made to persons more than seven years before your death are tax-free (they must be to people as opposed to trusts or businesses). 

These are known as 'potentially exempt transactions' because tax may be due if you survive seven years after making the donation. Transfers that may be excluded are discussed further below. 

A mortgage deposit is another method to provide money to your children, but you should get independent advice before proceeding.

Gifts that benefit you

If you give something away but still profit from it (a "gift with reservation"), it will still be considered a part of your estate and count towards the value. For example, if you give away your home but continue to live in it rent-free until your death, you will be considered the beneficial owner, and the property will still be taxed as part of your estate when you die. Do you have a will? Make your will and have it evaluated by Simpwill for an affordable price - learn more at Simpwill.

How does annual exemption work?

The yearly exemption allows you to give away up to £3,000 tax-free each tax year. You can also carry any unused yearly exemption forward to the following tax year, but only for one tax year. So, if you didn't utilise this allowance last year, you might give away a total of £6,000 this year - but you won't be able to carry over last year's unused yearly exemption to the next tax year. As a couple, you'll normally be allowed to give away £6,000, and perhaps £12,000 if you didn't make any significant presents the previous year.

‘Potentially exempt transfers’ for (IHT) inheritance tax

Most gifts you give to others throughout your lifetime (unless they are tax-free) are categorised as 'potentially exempt transfers,' or PETs for short. 

There is no inheritance tax if you live for seven years after making the gift. If you die during this time period, the gift will be included in your estate for inheritance tax purposes.
PETs are often allocated to your £325,000 tax-free limit before the remainder of your inheritance. As a result, unless you donate gifts worth more than this amount, the receivers are unlikely to pay inheritance tax.

However, if a large portion of the tax-free limit has been used up on PETs and taxable lifetime gifts, there may be little or no allowance to utilise against the remainder of the inheritance.

What is IHT ‘Taper Relief’

Even if tax is required on a gift, the tax may be reduced due to 'taper relief.' While taper relief may decrease tax on PETs if you die within seven years of making them, it does not lower the total amount of tax owed on your estate. Reach out to one of our will writing experts today for more information on ‘taper relief’.