Many people choose to make gifts to family and friends during their lifetime. Not only can this allow you to see loved ones benefit; it can also help reduce the value of your estate for inheritance tax purposes.
However, the rules governing lifetime gifts and estate planning are technical and often misunderstood. If you are considering making a gift, it is important to take professional advice to ensure that the gift is structured correctly and benefits from the available exemptions.
Below is an overview of the main inheritance tax exemptions and allowances that may apply.
Annual exemption
Each individual can give away up to £3,000 per tax year without triggering an IHT charge. This allowance can be used for one gift or several smaller gifts totalling £3,000. If unused, this allowance can be carried forward for one tax year.
Small gift exemption
You are alternatively able to make any number of gifts of up to £250 per person, per tax year, free of inheritance tax. Notably, this exemption cannot be combined with any other exemption for the same recipient in that tax year.
Other exemptions
Gifts between spouses or civil partners, and further, charitable gifts, are exempt from inheritance tax.
Wedding or civil partnership gifts may also qualify:
- parents can give £5,000;
- grandparents can give £2,500; and
- other relatives or friends can give £1,000.
Additionally, gifts made to assist with family maintenance – such as supporting an ex‑spouse, a dependent relative, or a child under 18 – can be exempt.
Gifts out of surplus income
This valuable but often underused exemption applies where gifts are made regularly from surplus income, rather than capital.
To rely on this exemption, it must be clear that:
- you have surplus income available after meeting your normal living expenses, and
- the gifts form part of a regular pattern of giving.
Keeping clear and consistent records is essential when seeking to claim this exemption.
Potentially exempt transfers
A gift of unlimited value may be made as a potentially exempt transfer (PET), becoming fully exempt from inheritance tax if you survive seven years from the date of the gift. However, should you die within this seven-year period, the gift becomes chargeable and will be brought back into your estate, using some or all of your Nil Rate Band (see below).
The Nil Rate Band
Each estate benefits from a tax‑free allowance known as the Nil Rate Band (NRB). This is currently £325,000, meaning the first £325,000 of your estate is taxed at 0%. Any value above this threshold is typically subject to inheritance tax at 40% on death, while certain lifetime chargeable transfers may attract a reduced rate of 20%.
Importantly, the NRB is transferable between spouses and civil partners. If the first to die does not use all of their NRB – for example, because their estate passes to their surviving spouse and is therefore exempt – any unused proportion can be transferred. This allows the surviving spouse or civil partner’s estate to benefit from a combined NRB of up to £650,000, taxed at 0%.
Residence Nil Rate Band
An additional allowance – the Residence Nil Rate Band (RNRB) – may be available where an individual with an interest in a qualifying residence leaves it to direct descendants. The RNRB is currently £175,000, and it applies only to qualifying residential property. As with the standard Nil Rate Band, the RNRB is transferable between spouses and civil partners, meaning that a combined allowance of up to £350,000, taxed at 0%, may be available on the second death.
To benefit from the full RNRB, the value of the deceased’s estate must not exceed £2 million. Where the estate exceeds this threshold, the RNRB is tapered, reducing by £1 for every £2 over £2 million. Consequently, the allowance is lost entirely once the estate reaches £2.35 million.
How Moore Barlow can help
Lifetime gifting can be an effective tax‑planning strategy, but the rules are nuanced and the implications significant. Careful structuring and proper documentation can make a substantial difference.
Given the complexity of the inheritance tax framework, taking expert advice is strongly recommended before making any substantial gifts or changes to your estate planning arrangements.
Our team of experienced specialist wills, trusts and estates solicitors provide tailored advice to help you protect your assets and ensure your wishes are carried out.
