What are the rules on gifts and exemptions for inheritance tax?

What gifts qualify for exemption or relief from inheritance tax? Melissa Hughes, Head of Wills and Probate at GW Legal, explains the rules on gifts and exemptions for inheritance tax.

What are the current inheritance tax rates?

Inheritance tax (IHT) is the tax that is paid on someone’s estate when they pass away. All money, property and personal possessions form part of a person’s estate. The value of the estate will determine whether any IHT is payable.

The current rate of IHT is 40% and is only charged on the part of the estate that is above the threshold, also known as the nil-rate band. Everyone has a nil-rate band which is currently set at £325,000 until 5 April 2028.

For example, if you left an estate worth £650,000, the first £325,000 would be tax free and the remaining £325,000 would be taxed at 40%.

If you own a property on your death, your estate can also benefit from the residence nil-rate band if ultimately the property is being left to your direct descendants, such as children or grandchildren. The residence nil-rate band is currently £175,000. This means, your own personal threshold could increase to £500,000.

Using the above example again, if this was the case, the first £500,000 would be tax free and then only the remaining £150,000 would be taxed at 40%, limiting the IHT bill.

There is a reduced rate of IHT at 36% instead of 40% if the deceased had left over 10% of the net-value of their estate to charity(s) in their will.

How much can you give to a spouse or civil partner tax-free?

If you are married or in a civil partnership, you can pass your entire estate to your surviving spouse or civil partner, tax free when you die. This means the surviving spouse can inherit your whole estate without having to pay any IHT.

You can also pass any unused nil-rate band or residence nil-rate band to your surviving spouse or civil partner on death. If you did not use any of your nil-rate bands, your spouse or civil partners could essentially be topped up by 100%, leaving them with a nil-rate band of £1 million when they pass.

There is no IHT payable on gifts to a spouse or civil partner during your lifetime, so long as they are living permanently in the UK. You can also make as many as you wish.

What gifts qualify for exemption or relief from inheritance tax?

Annual exemption

Everyone has an annual exemption of £3,000, meaning you can give away a total of £3,000 worth of gifts each year, whether to one person or split between multiple people, without them being added to the value of the estate. You can carry an unused annual exemption forward for one tax year only.

Gifts worth less than £250

You can give as many ‘small gifts’ up to £250 as you want each tax year, so long as you have not used another allowance on the same person.

Weddings and civil partnerships

Each year, you can give to someone who is getting married a tax-free gift, up to the value of:

£5,000 to your child
£2,500 to your grandchild
£1,000 to anyone else

This can also be combined with your annual exemption. For example, you could gift your child £8,000 for their wedding and it be tax-free, if you used your wedding gift allowance of £5,000 and your annual exemption of £3,000.

Charities

To encourage more people to leave donations to charity in their will, any gifts to a qualifying charitable body are exempt from IHT. This also applies if they are gifts made during your lifetime. As mentioned above, if you leave over 10% of your net-estate to charity, your IHT rate will also be reduced to 36% for the remainder of your taxable estate.

Agricultural property

You can pass on agricultural property, either during your lifetime or as part of your will, without having to pay IHT, but only if it meets certain conditions. Agricultural property that qualifies for exemption of IHT is ‘land or pasture that is used to grow crops or to rear animals’. However, farm assets are not free from tax, such as farm equipment and machinery, livestock, derelict buildings or harvested crops.

In order to qualify, you must also have owned the land and occupied for agricultural purposes immediately before its transfer or, 2 years if occupied by the owner, a company controlled by them or their spouse or civil partner, or 7 years if occupied by someone else.

Business relief

Any ownership of a business or share in a business is included in your estate for IHT purposes. However, your executors can apply for business relief of either 50% or 100% on some of an estate’s assets which can be passed on, provided the deceased owned the business or asset for at least 2 years before they died.

Pensions

Pensions can be passed on to your beneficiaries without any IHT becoming due. If you pass away before the age of 75, your beneficiaries won’t have to pay any tax at all. If you pass away over 75, your beneficiaries at most will pay their own marginal rate of income tax.

What is a potentially exempt transfer (PET)?

A potentially exempt transfer (PET) allows an individual to make gifts of unlimited value which will become exempt from IHT if you survive for 7 years after making the gift. If you don’t survive the 7 years after making the gift, the gift will still form part of your taxable estate, but taper relief may be available depending on when the gift was given.

Gifts could include money, property or land, stocks or shares, and personal possessions.

Gifts given up to 3 years before your death are taxed at the normal 40%. Gifts given between 3-7 years before your death have the benefit of taper relief at the following rates:

Period before death	IHT rate
3-4 years	32%
4-5 years	24%
5-6 years	16%
6-7 years	8%
7+ years	0%

If you gave away a gift, but still have an interest in it, for example you gave your property to your child but continued to live there rent free, the house would still be considered as part of your estate and chargeable to inheritance tax.

Melissa Hughes gwlegal

About the author

Melissa Hughes is a Solicitor and Head of Wills & Probate at GWlegal, @GWlegal. With over 10 years’ experience in the legal industry, Melissa specialises in all aspects of Private Client matters, including the preparation of Wills, Probate, Estate Management and Lasting Power of Attorney.

Find out more

How Inheritance Tax works: thresholds, rules and allowances (GOV.UK)

Pay your Inheritance Tax bill (GOV.UK)

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Publication date

4 September 2023

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.