What You Can Give Away Without Paying IHT

Inheritance tax receipts are expected to amount to a record £9.7 billion for Treasury coffers by 2028-29 as they continue to rise, according to the latest HMRC data.

In a bulletin published each month listing tax receipts, HMRC revealed that households paid IHT worth £6.8 billion between April 2023 and February 2024, a £0.4 billion increase over the previous year.

The independent Office for Budget Responsibility (OBR) recently calculated that IHT receipts will likely increase by 37 per cent. In the 2023-24 financial year, the Treasury collected a record £7.1 billion of IHT, and 2022-25 looks to exceed that total.

IHT receipts are rising as more families discover the growing value of their estates, but the level at which IHT is due remains frozen.

The IHT threshold last changed to £325,000 in 2009 and will remain locked at that amount until at least April 2028.

Financial experts consider IHT a discretionary tax, which families can avoid by applying for legal reliefs and exemptions. One of the most-used exemptions is gifting money and other assets before dying, and here are some IHT gifting tips.

Tax-Free Gifts For Your Partner

Married couples and civil partners can pass their entire estate to a spouse without paying inheritance tax. Unfortunately, unmarried partners do not have the same tax benefit, however long they have lived together.

Tax-Free Gifts To Family

The simple rule is that giving to children, family, or friends is free of inheritance tax as long as you live for seven years or more after making the gift.

If you die within the first seven years, the gift is a Chargeable Transfer subject to IHT taper relief. Taper relief is a sliding scale tax rate that reduces to nil over time.

After seven years, the gift becomes a Potentially Exempt Transfer (PET) tax-free.

The taper relief scale is:

Years between gift and deathRate of IHT on the gift
Up to 3 years40%
3 to 4 years32%
4 to 5 years24%
5 to 6 years16%
6 to 7 years8%

Taper Relief only applies to the part of a gift which is more than the IHT tax-free threshold. No IHT is paid if the estate is worth less than the threshold.

Gifting To A Charity

Wealthy families can save thousands of pounds in IHT by ensuring that 10 per cent of an estate is gifted to charity. Gifts to charities that meet the 10 per cent rule reduce the overall tax rate from 40 per cent to 36 per cent for the entire estate valued over the IHT threshold.

The discount is only available if gifts to charity amount to 10 per cent of the estate at death, even though the gift can be made while living and to multiple charities.

The Secret IHT Gift Allowance

Everyone has this IHT allowance, but they have yet to learn about it!

The gift allowance is a tax-free benefit you have while alive that lets you give away up to £3,000 tax-free each year.

If the allowance is not used in full, the unused part can be carried forward to the following tax year. However, the allowance can only be carried forward one year before it is lost.

Small Gift Allowance

You can gift as many people as you wish up to £250 a year if the same person has not received another IHT-free gift from you. Birthday and Christmas gifts are exempt.

Wedding Gifts

Each tax year, you can give a tax-free gift to someone getting married or starting a civil partnership. You can give up to:

  • £5,000 to a child
  • £2,500 to a grandchild or great-grandchild
  • £1,000 to anyone else

You can combine a wedding gift with any other allowance except the small gift allowance.

IHT Gifting FAQ

Can I gift my house and still live there?

You cannot give away your house and still live there. This is called a gift with reservation because you are still gaining a benefit despite giving the property away. The values of any gifts with reservation are added to your estate and taxed. Other examples of gifts with reservation are gifting a caravan but still taking free holidays in it or hanging a painting in your home that you have gifted to a friend.

If you give away your home before you die, you pay no IHT if you move out and live for seven years.

If you want to stay living there, you must pay the new owner rent at the local market rate, pay a share of the bills and live there for at least seven years.

Can I gift my home without paying IHT?

Passing the home to a spouse or civil partner incurs no tax. If you leave the property to someone else, the value counts towards your net worth, which is liable to IHT. If you leave the home to your children—including grandchildren and adopted, foster, and stepchildren—you can increase your nil-rate band by £175,000 to £500,000.

Can I pay a relative to look after me?

You can make irregular payments to someone, like a carer. The gift has no limit and is tax-free provided:
– You can afford the payments on top of your living costs
– You pay from regular monthly income, not borrowings or savings
These are called ‘normal expenditure out of income’ and can be combined with any other IHT allowance except the small gift allowance.

How does IHT work for expats dying overseas?

IHT is only paid on UK assets by an expat with a permanent home overseas. Some assets (outside of IHT) are excluded, such as foreign currency accounts with a bank or the Post Office, overseas pensions, like QROPS or investments with unit trusts or open-ended investment companies (OEICs).

How long must I live overseas to qualify for an IHT exemption?

Expats are considered living in the UK if they have:
– Had a permanent home in the UK for 15 of the past 20 years
– Had a permanent UK home for any length of time during the three years before death

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