Gifts you make during your lifetime may or may not escape inheritance tax, and can be classified as follows:
exempt;
potentially exempt; or
chargeable.
Exempt lifetime gifts
Certain exemptions apply to both gifts you make on death and during your lifetime. These include:
gifts to a spouse or civil partner;
gifts to charity;
gifts to political parties;
gifts of land to housing associations;
gifts for national purposes; and
gifts to heritage maintenance funds.
There are some exemptions, however, that only apply to lifetime gifts. Details of these are below.
Annual exemption
You are allowed to make gifts of up to £3,000 in any tax year, and these will be free from inheritance tax. You can carry forward any unused balance to the next tax year but not into subsequent years.
Small gifts exemption
In any tax year you can make outright gifts of up to £250 to any number of individuals without the gifts being subject to inheritance tax. This exemption cannot be used in conjunction with any other exemption, for example the £3,000 annual exemption.
Normal expenditure out of income
If you have surplus taxable income and still have enough income to maintain your usual standard of living, you can give away part or all of the surplus income and the gift will be free from inheritance tax. The gifts need to form a regular pattern (for example, paying annual school fees) and it is advisable that you keep a record of your income, living costs and pattern of gifts.
Wedding and civil partnership gifts
If your son or daughter is getting married or entering into a civil partnership, you are able to give them £5,000 free from inheritance tax. Each grandparent can give £2,500 and any other person can give £1,000 without any inheritance tax being due. Any gift must be made on or before the ceremony takes place. If the ceremony does not take place, the exemption is not available.
If a gift is exempt from inheritance tax, it does not need to be reported to HMRC.
What gifts should you think about making each year?
If you would like to minimise the amount of inheritance tax that will be due on your death, you may like to think about reducing the size of your estate during your lifetime. You can do this by making use of lifetime exemptions which can be used on an annual basis to make sure you are not paying unnecessary tax on your death.
The exemptions apply for a tax year, which runs from 6th April in any one year to 5th April the following year. You must make any gift before midnight on 5th April if you want it to count for that particular tax year. It is, of course, advisable to start considering and making any gifts well in advance of this date.
Are any of your relatives getting married or entering into a civil partnership this year?
You are allowed to give your child £5,000 free from inheritance tax on the occasion of their marriage or civil partnership. Grandparents can give £2,500 and any other person can give £1,000.
Do you have surplus after-tax income?
If you earn more post-tax income than you need to maintain your regular standard of living, you may want to consider giving some of the surplus income away as the gift would not be subject to inheritance tax. A pattern of gifts must be established and so this could be a useful way for grandparents to help with a grandchild’s school fees.
Are there people you would like to receive £250?
You can give up to £250 to as many different individuals as you like and none of the gifts will be subject to inheritance tax.
Make sure you use your annual exemption of £3,000
You should think about making a gift of your £3,000 annual exemption. This cannot be to any of the individuals you have already given £250. If you do not use all of your annual exemption in one tax year, you can carry forward the unused proportion to the next tax year but not thereafter.
Do you want to make any gifts to charities, political parties, national museums, universities, etc?
The majority of gifts you make to these institutions will be free from inheritance tax.