Inheritance Tax Gifts and Exemptions
With the nil rate bands for inheritance tax gifts frozen for 16 years, more individuals are turning to lifetime gifts to reduce their estate’s IHT liability.
While any gift becomes exempt if the donor survives seven years, it’s wise, especially for older individuals, to make full use of available exemptions. These offer immediate relief and can simplify estate planning.
Spouse or Civil Partner
Gifts between spouses or civil partners are fully exempt from inheritance tax. However, such transfers don’t reduce the couple’s overall estate value. If one partner is younger or in better health, it can make sense for that person to hold more assets. This way, they can later make gifts to other family members more effectively.
Annual Exemption
The annual exemption allows gifts of up to £3,000 each tax year. If not used, it can be carried forward for one year only. The current year’s allowance must be used first.
For example, a couple could contribute £6,000 annually into a Junior ISA for a grandchild, entirely exempt from IHT.
Gifts from Income
Of all inheritance tax gifts exemptions, this is often the most useful, but also the most complex. There’s no monetary limit, but three strict conditions must be met:
- The gift must be made from income, not capital. HMRC considers income to become capital after two years.
- The gift must be regular or habitual. One-off gifts don’t qualify.
- The donor must retain enough income to maintain their usual lifestyle.
This exemption is ideal for things like school fees or monthly support for family. It wouldn’t apply to a one-off house deposit, which isn’t considered habitual giving.
Planning around inheritance tax gifts can save thousands, but must be done carefully. HMRC’s official guidance provides a helpful overview of exemptions and criteria.