IHT: Gifts

What are the Inheritance Tax (IHT) implications of giving away assets? What exemptions and reliefs are there for gifts?

Subscribers see Client Briefing: Making gifts & IHT.

This is a freeview 'At a glance' guide to the IHT implications of making gifts.

At a glance

There are various lifetime and death exemptions and reliefs applicable to Inheritance Tax including:

• Annual exemption.
• Spouse/civil partner exemption.
• Normal expenditure out of income exemption.
• Business and Agricultural Property Reliefs (BPR and APR).
• Charitable donation exemptions.

Overview and examples

Spouses and civil partners

Lifetime and death transfers between UK domiciled spouses/civil partners are exempt from IHT. 

See Transferable Nil Rate Band for what happens to any unused nil rate band of the first spouse/civil partner to die.

There are special rules and restrictions affecting non-domiciled spouses or civil partners.

A non-UK domiciled spouse can make an election to become UK domiciled for IHT purposes only.

See IHT: Non-domiciled spouses

Non-domiciled individuals

• A non-UK domiciled individual is exempt from IHT on non-UK assets unless a spousal election has been made.
• Before April 2017 a non-UK domiciled individual became 'deemed' as UK domiciled if resident in the UK for 17 out of 20 years. 

From April 2017:

• The number of years of UK residence for deemed domicile to be applicable is reduced to 15 out of the previous 20 years.
• Individuals will also be deemed domiciled in certain other circumstances especially if they have a UK domicile of origin.
• See Non-domicile status, deemed domicile & tax.

Note that it is proposed that from 6 April 2025 the domicile-based IHT regime will be replaced with a residence-based regime. See Non-Doms & Remittance 2024 Proposals: Client Briefing

Exempt gifts

Certain gifts are exempt from IHT, they include lifetime gifts and bequests i.e. gifts on death made to certain organisations including:

• Qualifying charities.
• Community Amateur Sports Clubs (CASCs).
• Gifts for national purposes to qualifying bodies e.g. the National Gallery, National Trust etc. See Heritage Assets: IHT and CGT relief
• Gifts to political parties are subject to the strict condition of s.24 IHTA 1984. See the Court of Appeal decision in Arron Banks v HMRC [2021] EWCA Civ 1439.

Lifetime exemptions for gifts of non-business assets

It is possible to make gifts during a lifetime that are exempt from IHT, they do not use the nil rate band and they are not Potentially Exempt Transfers (PETs) (see below). Some of these are annual exemptions meaning that, for example, a small gift of £250 can be made to the same person every year and it will be exempt.

Lifetime exemptions also include regular gifts out of income.

• See IHT: normal expenditure out of income (gifts)

Potentially Exempt Transfers (PETs)

Other gifts are taxable if the transferor dies within seven years of making the gift. Taper Relief can reduce the value of the death IHT charge (where the failed PET is not covered by a nil rate band):

• Where IHT is due because a PET has failed, the tax is due by the donee unless the deceased's will says otherwise. 
• The nil rate band is allocated to failed PETs first and is only then available to the rest of the estate if the value of failed PETs is below the limit.
• When reviewing the availability of the nil rate band for use against failed PETs on death, any chargeable lifetime transfers, e.g. transfers into trust, made in the seven years prior to the PET and not the death, must be taken into account. This is known as the 14-year rule.

See IHT: Estate planning checklist

Reliefs from IHT

Business Property Relief (BPR)

Business Property Relief provides relief from Inheritance Tax on the transfer of relevant business assets at a rate of 50% or 100%. Relevant property must usually be held for at least two years in order to qualify for relief.

See IHT Business Property Relief

Agricultural Property Relief (APR)

Agricultural Property Relief is given on the agricultural value of agricultural property which has been:

• Occupied by the transferor for the purposes of agriculture for two years ending with the date of the transfer.
• Owned by the transferor for seven years ending with the date of transfer and occupied throughout by them or another for the purposes of agriculture.

APR is given at two rates: 100% and 50%.

See IHT Agricultural Property Relief

Charitable donations

If a donation of at least 10% of the net value of the estate is made to charity the IHT rate decreases to 36%. See IHT discount on charitable donations

The deceased's household and personal goods may be donated to charity by beneficiaries without a requirement to make a Deed of variation. The value of the donation is exempted as a charitable donation and may be included in the total in order to calculate a discount.

Donations to charity are only exempt if the charity is subject to the jurisdiction of UK courts.

Responsibility for IHT

• Tax is payable within six months of the end of the month of death, e.g. a death in December 2023 will mean the IHT must be paid by 30 June 2024. 
• Under s.200(1) IHTA the deceased's personal representatives or executors are responsible for settling the IHT of the estate.
  • This was confirmed in the case of Glyne T Harris as personal representative of Helena Norma McDonald (deceased) v HMRC [2018] TC06448 where the personal representative was held personally liable despite having distributed all assets of the estate to a beneficiary under the will.
• Where there have been PETs within seven years of death and tax is due on death it is the recipients of the PETs who are liable for the tax.

Capital Gains Tax (CGT)

Capital Gains Tax should not be overlooked when gifts of assets are being made. A gift is a CGT disposal at market value. For how to compute CGT on a gift and details of available reliefs see How to calculate a capital gain or loss and CGT reliefs: disposal of a business or its assets.