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What gifts might be caught by inheritance tax?

Pretty much anything you give away whilst you are alive could be caught by inheritance tax, depending on how long ago you gave it away. This can include a variety of items, and there are several ways to gift money or assets to family members. Here are some examples: 

1. Household and personal belongings

Items such as furniture, jewellery, or antiques passed on to family members count as gifts.

2. Property

Giving away a house, land, or other real estate is treated as a gift. 

3. Stocks, shares and investments

You can gift shares listed on the London Stock Exchange, as well as unlisted shares owned for less than two years before your death.

4. Discounted asset sales

Selling an asset, such as a home, to a family member for less than its market value means the difference is considered a gift.

These are gifts you can give to children, grandchildren or other family members. The link with inheritance tax is whether or not they receive the gift within seven years of your death. Under certain limits, like amounts and number of beneficiaries, you can make tax-free gifts whenever you want to ensure your loved ones reap the benefits of your legacy.

The inheritance tax threshold – below which no tax is due – is currently £325,000. Any proceeds above that amount are generally taxed at 40%.

To reduce the amount of tax due and ensure there’s more left over for your surviving family, you can make use of tax-free gifting and alternative ways to hold your legacy.

If you’re wondering how much money you can gift to a family member tax-free, contact a financial adviser today.

How much money can you gift to a family member tax-free? 

In the UK, you can gift money to anyone (including family members) without paying tax, up to certain limits. 

Gifts given less than 7 years before you die may be taxed depending on:

• Who you give the gift to and their relationship to you.
• The value of the gift.
• When the gift was given.

No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust, where different rules apply (and you should seek specialist advice if this applies to you). This is known as the 7-year rule.

If you die within 7 years of giving a gift and there’s inheritance tax to pay on it, the amount of tax due after your death depends on when you gave it, and a sliding scale applies.

However, the sliding scale only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.

By making gifts while you’re alive, rather than leaving money to family members in your will, you can follow the rules around inheritance tax and live to see your loved ones making the most of your generosity.

There are many different types of exemption or allowance, each of which comes with its own rules about eligibility. When gifting money to family, here’s what you need to know:

Annual exemptions

Each tax year, you receive an ‘annual exemption’, which allows you to gift a combined total of £3,000 tax-free between children, grandchildren and other members of your extended family. Anything from your annual exemption which you don’t use can roll over for one year only, allowing for up to £6,000 in tax-free gifts.

Gifts for weddings and civil partnerships

You can help make a family member’s big day with a donation of:

• £5,000 to a child.
• £2,500 to a grandchild or great-grandchild.
• £1,000 to any other person.

This gift can be given on top of money from your annual exemption but not from a small gift allowance.

Small gift allowances

You can make as many donations as you like of up to £250 per person in a single tax year, provided those people didn’t also benefit from your £3,000 annual exemption allowance, or the gifts for weddings and civil partnership exemption.

Gifts from regular outgoings

You can also make regular contributions to someone’s living costs, provided they’re paid from a regular income and you can show it doesn’t affect your financial circumstances (in other words, it doesn’t reduce your savings investments, or your standard of living).

Gifts to charities

Gifts and donations to charity are not subject to inheritance tax. Not only that, but when a charity donation is equivalent to at least 10% of your estate, any IHT payable elsewhere is reduced to 36%.

What are ‘potentially exempt transfers’?

If you’re giving someone a gift from your estate that doesn’t fall within one of the exemptions, then it is potentially subject to inheritance tax. If you give the gift and pass away within seven years, then for tax purposes the gift is considered to be part of your estate and will be taxed as such.

The reason they’re “potentially” exempt is that whether or not the transfer is exempt depends on whether you live for seven years after you’ve imparted the gift. Gifts made more than 7 years before you pass away, are not subject to inheritance tax. These can be of any value.

How does the seven-year rule work?

Inheritance tax may be payable on gifts made within seven years of your death if:

• The gifts are not covered by your annual gift allowance.
• The total value of the gifts exceeds £325,000 (your inheritance tax-free threshold).

How much inheritance tax will I pay on gifts above £325,000?

Inheritance tax is charged on the value of the gifts above the £325,000 threshold. This is calculated on a sliding scale up to a maximum of 40%, depending on the time that has elapsed between the act of gifting and your death.

For example:

David gave his daughter Helen £1,000 for the 2023-24 tax year. If David died within the next seven years, it would use up £1,000 of his annual exemption. 

David then gave his other daughter Mary £2,000 during the next tax year, 2024-25. If David dies within the next seven years, his £3,000 annual exemption would be combined with the £2,000 remaining from the previous tax year.

Therefore, even if David passed away within 7 years of making these gifts, there is no inheritance tax to pay.

For illustration purpose only, not a real customer example.

Should I declare cash gifts to HMRC?

In most situations, cash gifts don’t need to be reported to HMRC, and recipients usually won’t pay income tax on them – but keep records for clarity. However, there are exceptions where reporting is necessary:

• Gifts out of income exemption: If you’re using this exemption, you’ll need to keep evidence that the gifts meet the qualifying criteria.
• Inheritance tax: Executors of estates should declare gifts the deceased made within 7 years before death when calculating IHT.
• Complex gifts: Gifts involving trusts or other complex arrangements may require reporting.

For straightforward cash gifts within annual allowance limits, reporting isn’t usually required. But it’s always a sensible precaution to maintain records of larger or frequent gifts for future reference.

Alternatives to inheritance tax gifts

As well as gifting money to family, there are other ways to take care of them in future.

Life insurance

With careful planning, your family members could use the pay-out from a life insurance policy following your death to pay the Inheritance Tax bill. To ensure that the proceeds go directly to your family and aren't added to your estate (and therefore potentially adding to the taxable amount), you can write a policy in trust.

Junior ISA

Younger recipients would benefit from investing tax-free in a Junior ISA. It’ll require their parent/guardian’s help to set up, but it’s a good way to hold money in trust until they turn 18.

Who doesn’t pay gift inheritance tax?

Gifts between spouses or civil partners are exempt from inheritance tax. You can transfer any assets to them during your lifetime, provided that:

• They are a permanent resident in the UK.
• You are legally married or in a civil partnership.

Additionally, gifts made to registered charities or political parties are also free from inheritance tax.

For more information about Inheritance Tax and gifting, read our guide.

How to gift money to family FAQs

To help you make informed choices, we’ve compiled a list of frequently asked questions about gifting money.

Is there a limit on how much I can gift my children tax-free?

There is no fixed limit on what you can gift your children, but it’s important to consider your tax-free allowances:

• A £3,000 annual exemption.
• Unlimited small gifts of up to £250 per person per year.
• Regular gifts from surplus income, provided they don’t affect your standard of living.
• Larger gifts can also be exempt if you live for seven years after making them.

How does the 7-year rule affect multiple gifts?

Every gift you give begins its own seven-year countdown. If you pass away within seven years of making multiple gifts:

• The gifts are added back into your estate in the order they were given.
• Taper relief may reduce the tax on older gifts made between three and seven years before death, potentially reducing the tax rate.
• Each gift is assessed separately, with the tax rate depending on how long ago the gift was made.

Can I gift my home to my children and still live in it?

Yes, you can gift a property, but the following rules apply:

• If you gift your property and continue living there without paying full market rent, it counts as a ‘gift with reservation benefit’ and will remain part of your estate for inheritance tax.
• To remove it from your estate, you must pay market rent and live for at least another seven years after making the gift.
• You could also gift only part of the property and pay rent on the share you continue to use.
• Because these rules can be complex, it’s always important to seek professional financial advice before you proceed.

How are gifts to grandchildren taxed compared to gifts to children?

While the rules are mostly the same, there are some key differences:

• Both the £3,000 annual exemption and £250 small gift allowance can be used, the same as for children (remembering that you can’t use both of these exemptions for the same person).
• Wedding gift allowances differ – up to £5,000 for children, £2,500 for grandchildren and £1,000 to anybody else, such as a friend.
• Trust rules may vary depending on the arrangement.
• Gifts to minors can sometimes have income tax implications.
  

Are you unsure how to gift money to family?