Inheritance tax and gifts – what do you need to know?

THE festive season is here and many of us will be joining in the spirit of goodwill and giving gifts.

For older generations who have accumulated wealth above the inheritance tax threshold, Christmas may seem an appropriate time to gift sums of money to younger relatives.

The rules around gifts are complex and factors, including the timing of a gift, can impact on the amount of inheritance tax paid. So, before you begin a generosity spree, it is worth taking some time to look into the rules.

The law states small gifts such as Christmas or birthday presents, which are made out of normal income, are usually not subject to inheritance tax and they are known as exempted gifts.In each tax year, a person can give a total of £3,000 worth of gifts without them being added to the value of one’s estate, and this is known as the annual exemption. It is a lesser known fact that any annual exemption which goes unused can be carried forward to the following year. However, this can only be done for one year.

Outside of the annual exemption on gifts, wedding or civil ceremony gifts worth up to £1,000 per person – or £2,500 for a grandchild or great-grandchild, and £5,000 for a child – are allowable.

An individual can also give up to £250 in gifts per person to as many people as they wish in a single tax year, provided they haven’t used another exemption on the same person.

Many people will be aware of the ‘seven year rule’ around gifts given over the stated exemptions.

The rule dictates an individual must survive their gift by seven years for the amount to become exempt from inheritance tax. Should an individual pass away before seven years, a calculation of the tax due will be made on a sliding scale.

As gifts which fall outside the annual exemptions will be of significant value, the amount due in inheritance tax may be fairly substantial, and it is the recipient of the gift who will become liable for the tax charge. It is important anyone making such gifts is aware of the rules so they can inform the recipients of the caveats involved.

Gifts can be a useful form of inheritance tax planning, particularly alongside an up-to-date will. For more information on the rules, allowances and exemptions around inheritance tax, call Rebecca O’Donnell, Head of Private Client at O’Donnell Solicitors, on 01457 761320 or email

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