Inheritance Tax on gifts: what are the rules?
New research suggests that tax breaks on gifts between family members could encourage more parents and grandparents to pass on a ‘living inheritance’ to the younger generation, giving them a boost as they try to climb the property ladder.
As it stands, some assets you give away as gifts while you’re alive can still be counted as part of your estate. This means that their value would be included in the total sum used to calculate inheritance tax.
So, how do inheritance tax rules currently affect financial gifts?
Gifts exempt from inheritance tax
This is the easy part: if you make a gift more than seven years before you die, it will not count as part of your estate.
You also get an ‘annual exemption’ of £3,000 per tax year on any gifts made from capital investments or savings.
Finally, gifts given less than seven years before death are also ignored for tax purposes if they’re one of the following:
- A wedding or civil ceremony gift worth up to £5,000 if given to your child, £2,500 if given to your grandchild or £1,000 if given to anyone else
- A Christmas or birthday gift paid for out of your disposable income
- A gift to a charity or political party
- A payment you’ve made to cover care for a child under 18 or an elderly family member
- A gift worth up to £250, given to a person who hasn’t benefitted from any of the other exemptions mentioned in the past tax year
It’s also worth mentioning that the first £325,000 of your estate is taxed at 0%, so if the money you’ve gifted away plus your remaining assets are worth less than this, there won’t be any tax to pay. From 6th April this year, estates also attract an extra ‘nil rate band’ when property is left to a direct descendant.
How much inheritance tax is paid on gifts?
If a gift isn’t exempt under the rules above, it’s taxable but the amount payable is charged on a sliding scale based on the time between when the gift is made and when the giver dies:
| Years between gift and death | Tax paid |
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
The tax is claimed back from the recipient of the gift. For example, if you give your grandchild £20,000 towards their house deposit but pass away two years later, they could be required to pay £8,000, even if they’ve already spent the money.
Further information
For further information on planning or administering an estate, call our estate and tax planning solicitors in Bristol on 0117 325 2929 or complete our online enquiry form.