Gifting and Inheritance Tax

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As part of the estate-planning process or any deliberations about passing on wealth to the next generation, you may consider gifting money or property to family or friends whilst you are alive (instead of in your Will, that is in the event of your death). However, before taking the step of lifetime gifts, it’s important to be aware of the issues that surround gifting and Inheritance Tax (IHT), such as who you can gift to, how much you can gift, and the implications of continuing to benefit from the gift.

Giving away money or property to avoid IHT

One of the easiest ways to reduce your IHT liability is to gift money (or property) to friends, family, or charity while you are still alive. There are some lifetime gifts which will not incur IHT after your death, including those made to your spouse or civil partner. If you make a gift seven years before your death, it will usually be excluded from the value of your estate for IHT purposes. Gifting can be a complex area, so you should speak to a solicitor about gifts as part of the estate-planning process.

Who can I gift to and avoid IHT?

Gifts to your spouse or civil partner of any amount are usually IHT-free (but can be limited if your spouse/civil partner is what is known as “non-domiciled”), but this does not apply to unmarried partners/cohabitants.

How much can I give away?

This is a very common question, and most people think the answer is £3,000 each year. However, you are free to give away as much as you like, it is just that if you die within seven years of making gifts then only £3,000 from each year is ignored by HMRC.

In addition, you can roll over your exemption amount for one year only. So, for example, if you do not use any of your allowance in 2021, you can gift up to £6,000 in 2022.

Small gifts

You can give small gifts of up to £250 per person, such as for birthdays or Christmas presents, unless another exemption has been used for the same person.

Wedding gifts

There is also an exemption for wedding gifts, with the amount you can gift dependent on your relationship to the person who is marrying. If you are a parent, you can gift up to £5,000; if you are a grandparent or great-grandparent you can gift up to £2,500; and for everyone else, the exemption threshold is £1000.

Retained benefit

Whilst you can make a gift to someone and continue to benefit from the asset given away during your lifetime – for example, by transferring ownership of a property to someone, but continuing to live in the property or receive the rental income – this is of no benefit for IHT planning purposes as HMRC will always assess your estate as though you still own the asset given away, no matter how many years have passed since it was given away.