Lifetime gifting – the allowances and exemptions available to you

Many people will make gifts to loved ones out of their natural love and affection, but also in an attempt to save Inheritance Tax (IHT). However, it is useful to be aware of the allowances and exemptions available to you so you can make informed decisions.

In the event of a death, there is a requirement for the executor to provide on the IHT return details of gifts made by the deceased in the seven years prior to the date of death. Lifetime gifts take many forms and can include cash gifts, properties or personal items such as jewellery or a car. If you gift more than £3,000 in one tax year the gift becomes a Potentially Exempt Transfer and the value of the gift will be included in your estate for IHT purposes. If you survive seven years, then the gift is no longer included as part of your estate and therefore it will not be liable for IHT. However, if you do not survive for seven years following the date of the gift, there may be an IHT liability.

The allowances and exemptions available on gifts 

Gifts within a certain value can be made in each tax year without being subject to IHT. The allowances include the following.

Your annual allowance

Everyone is entitled to give away a total of £3,000 each tax year without an IHT liability. If this £3,000 allowance is unused then it can be added to the allowance for the following year so you could have an allowance for £6,000 for the year. The unused allowance can only be used in the following tax year and cannot be carried over any further years.

Gifts to your spouse

Gifts to your spouses are exempt from IHT. If the spouse is non-UK domiciled there are more complex rules upon which advice should be sought,

Small gift exemptions

You can give away as many gifts of up to £250 to as many individuals as you want, provided that they have not received a gift of your whole £3,000 annual exemption. These gifts will be exempt from IHT.

Wedding gift exemptions

You can make gifts for a wedding that will be exempt from IHT. However, there are different allowances based on the relationship between the donor and the individual receiving the gift. To be exempt from IHT, the gift must be worth:

  • £5,000 or less given to a child;
    • £2,500 or less given to a grandchild or great-grandchild; or
    • £1,000 of or less given to any other individual.

Additionally, the wedding gift allowance can be combined with any other allowance (except from the small gift allowance) if you are making gifts to the same person.

Gifts out of normal income

If your income is sufficient to maintain your normal standard of living, you can make gifts from your surplus/excess income. The following conditions must be met for the exemption to apply:

  • The gift must be part of your normal expenditure. What is deemed ‘normal’ expenditure will be based on what is normal for you personally – it will not be based on what is ‘normal’ for the average person, therefore each claim will be unique. The gifts must be regular and the pattern, value, frequency, nature and reason for the gifts will be factors that are considered.
    • The gift must be made out of your own income. Therefore, capital assets will not qualify.
    • After allowing for the gifts, you must have been left with sufficient income to maintain your usual standard of living. Gifts will not quality for the exemption if allowing for the gifts means that you had to use your capital to meet your normal living expenses. 

The rules on this exemption can be complex so it is recommended that you take advice if you wish to use this exemption.

How Moore Barlow can help

If you would like to discuss lifetime gifts further, please contact a member of our Private Wealth Team

We take time to understand your requirements, enabling us to offer you bespoke advice. With a team of specialists in tax, wealth management, estate planning and rural services our wide-ranging expertise enables us to provide you with practical solutions tailored to your and your family’s needs.