A recent survey undertaken on behalf of HMRC produced results showing that only a quarter of individuals making financial gifts have detailed knowledge of inheritance tax rules surrounding such payments. The results, which can be found in the report Lifetime Gifting: Reliefs, Exemptions, and Behaviours, showed a substantial lack of knowledge around most areas of gifts. This included the seven-year rule, annual exemptions or the potential tax liabilities.
Gifts
An individual may make gifts of up to £3,000 per tax year without incurring inheritance tax liabilities. Furthermore, where exemptions from a previous tax year have not been used, they may be carried forward. This means that, providing the IHT exemption was not used in a previous year, an individual can make a tax-free gift of £6,000 in the current tax year. In situations where the total gifts exceed the annual exemption available, if the individual making a gift survives 7 years, the seven-year rule will deem the transfer free of IHT tax.
Should the individual making a gift, die within seven years, tax will be levied on a sliding scale basis, also known as “taper relief”.
| Years between gift and death | Tax payable |
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
Where the gift was given less than three years before death, tax on the gift is charged at the full rate at 40%, reducing to a taxable rate of 8% if the gift is given six to seven years before death.
Gift with Reservation of Benefit
While a gift given more than seven years before death is not normally counted towards the value of the estate, this is not true where a gift is subject to a reservation of benefit. This means, for example, if an individual gives away their home to their children and continues to occupy it rent-free, the property is treated as forming part of the individual’s estate immediately before their death for IHT purposes.
Trivial Gifts
Additionally, alongside the aforementioned IHT annual exemption, small gifts of up to £250 per year can be made free from IHT. Such gift must be an outright gift to any one individual in a tax year.
Gifts on marriage can also be free of inheritance tax provided that set limits are not surpassed. Those limits vary depending on the relationship to the married couple:
- Parents – £5,000
- Grandparents, great-grandparents – £2,500
- Bride to groom, groom to bride, bride to bride, groom to groom – £2,500
- Other – £1,000
In certain situations, those exemptions can be combined to reduce a potentially exempt transfer (PET).
IHT Bands
The current IHT nil rate band for a single person is £325,000, and £650,000 for married couples or civil partners.
Married couples and civil partnerships also have the added benefit of the residential nil-rate band. The residential nil-rate band gives them an additional £150,000 each of tax-free property-based inheritance as of 6 April 2019. The allowance is due to rise to £175,000 from 6 April 2020 however, strict conditions must be applied.
