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What are the inheritance tax (IHT) implications of giving away assets? What exemptions and reliefs are there for gifts?

At a glance

There are various lifetime and death exemptions and reliefs applicable to inheritance tax including:

What’s new?

The Office for Tax Simplification has undertaken a review into ways to simplify Inheritance Tax and have published two reports the second of which makes recommendations including:

Overview and examples

Spouses and civil partners

Lifetime and death transfers between UK domiciled spouses/civil partners are exempt from IHT. 

See Transferable Nil rate band for what happens to any unused nil rate band of the first spouse to die.

There are special rules and restrictions affecting non-domiciled spouses or civil partner.

See IHT: non-domiciled spouses.

See Non-domiciled spouse IHT election for how to the rules work.

Non-domiciled individuals

From April 2017:

Exempt gifts

Certain gifts are exempt from IHT, they include lifetime gifts and bequests i.e.gifts on death made to certain organisations including:

Lifetime exemptions for gifts of non-business assets

It is possible to make gifts during lifetime which are exempt from IHT, they do not use the nil rate band and they are not potentially exempt transfers (see below). Some of these are annual exemptions meaning that, for example, a small gift of £250 can be made to the same person every year and it will be exempt.

Annual exemption, per year, if all or part has not been used in the previous year, one year may be carried forward

£3,000

Small gift exemption, per person

£250

Gifts on marriage/civil partnership:

 

By Parent

£5,000

By Grandparent

£2,500

By Others, Aunt, family friend etc

£1,000

Exemption for regular gifts out of income

No limit

Lifetime exemptions also include regular gifts out of income.

Potentially exempt transfers (PETs)

Other gifts are taxable if the transferor dies within 7 years of making the gift. The death charge is calculated as follows:

Reduced charge on other gifts made within seven years of death 

 

Years before death

% of death charge

0 -3

100

3-4

80

4-5

60

5-6

40

6-7

20

 

See Estate planning checklist

Reliefs from IHT

Business Property Relief

Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%. Relevant property must be held for at least two years in order to qualify for relief.

See IHT Business Property Relief (subscriber guide)

Agricultural Property Relief

Agricultural Property Relief (APR) is given on the agricultural value of agricultural property which has been:

APR is given at two rates: 100% and 50%

See IHT Agricultural Property Relief

Charitable donations

If a donation of at least 10% of the net value of the estate is made to charity the IHT rate decreases to 36%. See IHT discount on charitable donations

The deceased's household and personal goods may be donated to charity by beneficiaries without a requirement to make a Deed of variation. The value of the donation is exempted as a charitable donation, and may be included in the total in order to calculate a discount.

Donations to charity are only exempt if the charity is subject to the jurisdiction of UK courts, or those of another EU member state.

Responsibility for IHT

Capital Gains Tax

Capital gains tax (CGT) should not be overlooked when gifts of assets are being made. A gift is a CGT disposal at market value. For how to compute CGT on a gift and details of available reliefs see How to calculate a capital gain or loss and CGT reliefs: disposal of a business or its assets