Exemptions from Inheritance Tax

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Q: I am aware gifts made by me to an individual during my lifetime could be subject to Inheritance Tax, however I’ve heard there are some circumstances in which gifts are exempt and wondered what these are. Anon, Edinburgh.

A: Inheritance Tax is a tax on chargeable transfers, ie transfers made by an individual in the seven years prior to death and on the value of their estate on death. A lifetime charge also applies to certain chargeable transfers relating to settled property.

Gifts to an individual made during lifetime are potentially exempt transfers. A potentially exempt transfer is a lifetime transfer of assets that would be a chargeable transfer, had it not been made more than seven years before death, when it becomes an exempt transfer. A potentially exempt transfer becomes a chargeable transfer if it is made within seven years prior to death.

Exempt Gifts: There is complete exemption for transfers between UK domiciled spouses.

Annual exemption: Lifetime transfers of up to £3,000 per tax year are exempt. Any unused exemption may be carried forward for one year.

Small gifts: Up to £250 may be gifted to any person without any IHT implications.

Normal expenditure out of income: There is no upper limit provided the donor makes the gifts out of their income, has sufficient income to maintain their normal lifestyle and the gifts were part of their normal expenditure.

Marriage: Wedding gifts are exempt within certain limits, dependant on the donor’s relationship to the bride, groom or civil partner.

Family maintenance: Exemptions exist for gifts to maintain a spouse or for the maintenance, education or training of a child.

Other: Gifts to qualifying charities, political parties, for public benefit etc must be made without reservation to benefit fully from exemption.

Individual advice should be sought.