Inheritance Tax Gift Rules: What you need to know in the UK

Giving money or valuable assets to family and friends during your lifetime can have Inheritance Tax (IHT) implications in the UK. The rules can be complicated, and the tax treatment depends on the type and value of the gift, when it was made and how long the person giving it lives afterwards.

One of the most important rules is the seven-year rule.

Generally, if you give away an asset or money and survive for seven years, the gift can become exempt from Inheritance Tax. These are known as potentially exempt transfers.

However, if the person giving the gift dies within seven years, the value of the gift may be taken into account when calculating the estate's Inheritance Tax liability.

How much can you give away tax-free?

There are several important gift allowances.

You can generally give away up to £3,000 each tax year under the annual exemption. If you did not use the allowance from the previous tax year, you may be able to carry it forward for one year.

There are also exemptions for certain smaller gifts. You can normally give as many gifts of up to £250 per person as you like, provided the recipient has not already received a gift covered by another exemption.

Wedding and civil partnership gifts

Special allowances can apply to gifts made for a wedding or civil partnership.

The amount depends on your relationship with the person receiving the gift. For example, parents can give their child up to £5,000, while grandparents and great-grandparents can generally give up to £2,500.

Anyone else can normally give up to £1,000.

Gifts from regular income

Another important exemption can apply to normal expenditure out of income.

This can allow someone to make regular gifts from their income without those gifts becoming liable for Inheritance Tax, provided certain conditions are met.

The gifts must normally be affordable from the person's income, form part of their normal expenditure and leave them with enough income to maintain their usual standard of living.

What happens if you give away your home?

Giving away your home can have particularly complicated tax consequences.

There are circumstances where a person can benefit from the Residence Nil Rate Band, potentially increasing the amount of an estate that can pass to direct descendants without Inheritance Tax.

However, additional rules apply where someone gives away their home but continues to live there. This can potentially be treated as a gift with reservation of benefit, meaning the property may still be considered part of the person's estate for Inheritance Tax purposes.

Keep records of gifts

Anyone making significant gifts should keep clear records showing:

• What was given
• The value of the gift
• The date it was given
• Who received it
• Why the gift was made
• Which exemption, if any, was being relied upon

This can make things much easier for executors when dealing with an estate after someone's death.

Inheritance Tax rules can change, and individual circumstances can make a significant difference. Before making a large gift, it can be sensible to obtain professional tax or financial advice.