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Personal tax  •  Probate and Inheritance Tax

Tax rules for the season of giving

By RJP LLP on 13 December 2022

Gifts are often one of the most tax efficient ways to pass on assets during lifetime, either to family members or friends. If you are considering different options for inheritance tax planning, lifetime gifting is an obvious way to reduce the taxable value of your estate. This article explains how gifts are taxed (or not).

Lifetime gifts

It is possible to gift any amount of cash to another individual, and provided you survive the date when the gift was made by 7 years, it will not attract inheritance tax in your estate. This is known as a potentially exempt transfer and is usually regarded as one of the easiest and cheapest ways to reduce the value of your estate. If you do not survive the full 7 years, taper relief can mean any inheritance tax liability arising is reduced, however any such liability arises on the donee.

Where lifetime gifts are made of assets that attract capital gains tax, great care must however be taken. This is because HMRC substitute the market value of the asset for actual consideration and capital gains tax is payable by the donor on the gain arising based on this figure.

Therefore whilst cash can be gifted to an individual with no immediate liability arising, this is not the case where assets are concerned.

Gifts out of income

If you have surplus income and giving some away will not mean a drop in your living standards, you can also make tax free gifts provided they are 'normal expenditure out of income'. Such gifts fall outside the 7-year criteria, meaning that as soon as cash is gifted in this situation, it is deemed to be outside your estate. Gifts must be regular gifts, for example, for monthly or quarterly expenditure such as school fees, insurance premiums, regular holidays, a monthly allowance, and they must be made from income not capital. All gifts must be recorded in detail, and you must be able to demonstrate the existence of surplus income to cover them.

Annual gifting allowances

  • You can give away a total of £3,000 in gifts each tax year without them being included in the value of your estate. This can be to one person or split between several people. If you don’t use this exemption in one tax year, you can carry it forward to the next tax year only;
  • You can also give as many gifts of up to £250 per person as you want each tax year as long as you have not used another allowance on the same person;
  • Birthday or Christmas gifts you give from your regular income are exempt from inheritance tax;
  • Wedding gifts can also be made tax free provided the gift is received before the wedding.

The amounts allowable are:

  • £5,000 to a child;
  • £2,500 to a grandchild or great-grandchild;
  • £1,000 to another person.

Gifts to charity

In addition to lifetime gifts, if you make gifts to a charity or political party in your will, they may qualify for a reduced rate of inheritance tax (36% instead of 40%) applying to your remaining estate.

To qualify the charity must be registered in the UK and the amount left to the charity must be at least 10% of your 'net' estate.

To discuss gifting and the broader topic of inheritance tax planning in more detail, please contact us via

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