Gifting money or assets to your loved ones can be a generous way to share your wealth and provide support during their lifetime. In the UK, certain gifts are exempt from Inheritance Tax (IHT) or can be given tax-free under specific rules. Understanding these exemptions and how they work is essential to ensuring your gifts are not subject to unexpected taxes. This comprehensive guide explains how to make tax-free gifts to family and friends, the different allowances available, and practical tips to help you plan your giving effectively.
Understanding Inheritance Tax and Gifts
Inheritance Tax is usually charged on an estate when someone dies, but it can also apply to gifts made within seven years of death. However, certain gifts are exempt from IHT, either because they fall within specific allowances or because of how and when they are made. Knowing the rules around tax-free gifts can help you pass on your wealth efficiently and avoid unnecessary tax bills for your beneficiaries.
The Annual Exemption
Every tax year (6 April to 5 April), you can gift up to £3,000 without it being subject to IHT. This is known as the annual exemption and can be given to one person or split between multiple people. If you haven’t used this allowance in the previous tax year, you can carry it forward for one year only, allowing you to potentially gift up to £6,000 tax-free in a single year.
Small Gifts Exemption
You can also make as many small gifts of up to £250 per recipient per tax year as you like, provided that the recipient hasn’t already benefited from your £3,000 annual exemption. This is ideal for birthday or Christmas gifts to children, grandchildren, or friends, and allows you to pass on small amounts without worrying about tax implications.
Wedding and Civil Partnership Gifts
Wedding and civil partnership gifts are also exempt from IHT up to certain limits:
- £5,000 to a child.
- £2,500 to a grandchild or great-grandchild.
- £1,000 to any other person.
These gifts must be made on or shortly before the wedding or civil partnership ceremony and are an excellent way to support your loved ones’ new beginnings.
Regular Gifts from Surplus Income
If you have surplus income—meaning income left after meeting your usual living expenses—you can make regular gifts from this income that are immediately exempt from IHT. For example, monthly transfers to help a child with rent or paying for a grandchild’s school fees could qualify. To be eligible:
- The gifts must be made from income, not capital.
- The gifts should be regular (e.g., monthly or annually).
- The gifts should not reduce your standard of living.
HMRC may ask for evidence of your income, expenses, and the regularity of these gifts, so it’s wise to keep detailed records.
Potentially Exempt Transfers (PETs)
Gifts that don’t qualify for any of the above exemptions are considered Potentially Exempt Transfers (PETs). If you survive for seven years after making the gift, it becomes completely free of IHT. However, if you die within seven years, the gift counts towards your estate and may be subject to IHT. The tax rate on PETs reduces on a sliding scale if the gift was made more than three years before your death—this is known as taper relief.
Charitable Donations
Gifts to registered UK charities are completely exempt from IHT, whether made during your lifetime or left in your will. Making donations to charity can be a great way to support causes you care about while also reducing the potential tax burden on your estate.
Gifts Between Spouses and Civil Partners
Gifts between spouses and civil partners are completely exempt from IHT, provided both partners are domiciled in the UK. This allows you to transfer assets freely between each other without worrying about tax implications.
Using Trusts for Lifetime Gifts
Trusts can be a useful tool for gifting assets while maintaining some control over how they are used. While gifts into most trusts are considered chargeable lifetime transfers and could be subject to IHT if they exceed the nil-rate band, they can still be a tax-efficient way to manage wealth, especially if used strategically for longer-term planning. Professional advice is recommended if considering trusts for substantial gifts.
Record-Keeping and Evidence
It’s important to keep detailed records of all gifts made, including dates, amounts, and the recipients’ details. This helps your executors prove which gifts are exempt and which are potentially subject to IHT. For gifts from surplus income, maintain annual income and expenditure statements to demonstrate eligibility for the exemption.
Practical Example
Consider Susan, who has three children and two grandchildren. She gifts £3,000 each to two children (£6,000 total, using the annual exemption and last year’s carry-forward) and gives £250 each to her grandchildren as small gifts. She also pays £500 per month from her surplus income to help one child with rent. Susan keeps careful records of her income, spending, and gifts each year to ensure her estate can claim all exemptions if necessary.
When to Seek Professional Advice
Gifting can be complex, especially if your estate is large or if you’re considering using trusts or making substantial gifts. A tax adviser or estate planning specialist can help you structure your gifts to maximise tax efficiency and ensure you remain compliant with HMRC rules.
Conclusion
Making tax-free gifts to family and friends is a generous way to share your wealth and reduce the size of your estate for Inheritance Tax purposes. By understanding and using the available exemptions—such as the annual exemption, small gifts, wedding gifts, gifts from surplus income, and PETs—you can give confidently and responsibly. Keep detailed records, plan your giving, and seek professional advice where needed to ensure your generosity doesn’t come with unexpected tax consequences.
