Inheritance tax planning and tax-free gifts
Can I give money away to avoid inheritance tax?
If your estate is worth more than £325,000 (or £650,000 for married couples and civil partners), some of it may pass to HMRC in inheritance tax when you pass away.
One of the most straightforward ways to avoid inheritance tax is to consider giving away assets while you are still alive.
You're allowed to gift some of your money away each year without any tax being due after your death. This includes gifts to your spouse or civil partner, or if you'd like to leave money to a charity.
It usually also includes gifts to individuals made more than seven years before your death.
However, if you make a gift within seven years of your death, it will generally be included in your estate for inheritance tax purposes.
There may also be inheritance tax due if you put your money into a trust, or if you're passing on ownership or shares in a business (although you may be able to get business relief - which is explained further on gov.uk).
- Find out more: how do you put life insurance into a trust?
Tax-free gifts in numbers
The list below explains some of the key details for making tax-free gifts. However, this can be a tricky area so it's worth speaking to a professional for advice on your specific circumstances.
- £0 - The amount of tax due on gifts to your spouse or civil partner
- Seven - Number of years you have between gifting something to an individual that isn't your spouse and your death to ensure it's tax-free
- £3,000 - The total amount you can gift tax-free in a tax year (your 'annual exemption')
- £250 - Maximum amount you can gift tax-free to an individual that hasn't benefited from your annual exemption each year
- £0 - Amount of tax due on gifts given for maintenance of old or infirm relatives
- 18 - The age up to which you can gift your children with maintenance for their education or training tax-free
- £5,000 - The amount a parent can gift their child tax-free for their wedding
- £0 - Amount of tax due on gifts to charities or political parties.
Who can I give money to tax-free?
Gifts to your spouse or civil partner
These gifts are usually tax-free. This doesn't include unmarried partners.
You can find out more in our guide to inheritance tax: thresholds, rates and who pays.
Gifts to your family or other individuals
If you wish to leave money to other family members, such as your children, it's a good idea to plan how you want to do this.
Some gifts are best to give while you're still alive rather than leave in your will. Most gifts to people made more than seven years before your death are tax-free (they must be to people as opposed to trusts or businesses).
These gifts are called 'potentially exempt transfers', because tax might be payable, depending on whether you survive seven years after making the gift. Potentially exempt transfers are explained further below.
Another way to gift money to your children is through a mortgage deposit, but you should take independent advice before going ahead with this.
- Find out more: how does family income benefit insurance work?
Gifts that benefit you
If you give something away but still benefit from it (a 'gift with reservation'), it will still count towards the value of your estate.
For example, if you give away your home but continue to live in it rent-free until your death, you'll be deemed to be the beneficial owner, and it will still be taxed as part of your estate when you pass away.
- Are you making a will? Make your will and get it reviewed by Which? Wills, all for a fair price - visit Which? Wills to find out more.
How the annual exemption works
The annual exemption means you can give up to £3,000 away tax-free during each tax year.
You can also carry any unused annual exemption forward to the next tax year - but you can only do this for one tax year. So, if you didn't use this allowance last year, you could give away a total of £6,000 this year - but you won't be able to carry forward last year's unused annual exemption to the next tax year.
As a couple, that means you'll usually be able to give away £6,000, and potentially £12,000 if you didn't make any substantial gifts the year before.
- Find out more: what are the different types of life insurance?
Which gifts are tax-free?
'Potentially exempt transfers' for inheritance tax
Most gifts you make to other people during your lifetime (unless they fall into the list of tax-free gifts) are classified as 'potentially exempt transfers', or PETs for short.
If you survive for seven years after making the gift, no inheritance tax is due. However, if you die within this time, the gift will be considered part of your estate for inheritance tax purposes.
Generally PETs are applied to your £325,000 tax-free allowance before the rest of your estate. So, unless you've given gifts worth more than this allowance, the recipients are very unlikely to pay inheritance tax .
However, if much of the tax-free allowance has been used up against PETs and taxable lifetime gifts, this can leave little or no allowance to be used against the rest of the estate.
- Find out more: inheritance tax thresholds, rates and who pays
What is inheritance tax 'taper relief'?
Even if tax does become due on a gift, the tax may be reduced because of 'taper relief'.
The table below explains how taper relief can reduce tax due on potentially exempt transfers (PETs):
| Number of years between gift and death | Rate of IHT on the gift |
|---|---|
| 0-3 years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
While taper relief may reduce tax on PETs if you die within seven years of making them, it won't reduce the tax due on your estate as a whole.
If that seems complex, consider the following examples, all of which involve trying to pass on £600,000, partially as gifts and partially as a final estate.