Tax exemptions on gifts & inheritance tax

Tax exemptions on gifts & inheritance tax

What is classed as a gift according to HMRC?

  • anything that has a value, such as money, property, possessions
  • a loss in value when something’s transferred, for example, if you sell your house to your child for less than it’s worth, the difference in value counts as a gift


Tax-exempt gifts

Each donor has a total annual exemption of gifting £3,000 to use each tax year and allowance can be transferred to the following year if not used. E.g., a £3,000 allowance for the year 2021-22 can be transferred to the year 2022-23 if not used, providing a total exemption of £6,000.

Note: unused annual exemption can only be transferred for one tax year.

Additional gifts:

  • Wedding/ Civil ceremony gifts of up to £1,000 per person
  • £2,500 for Grandchild or great-grandchild
  • £5,000 for a child
  • Ordinary gifts out of income already taxed for Christmas or birthday presents, the donor must be able to maintain their standard of living after making the gift
  • Payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • Gifts to charities and political parties


Small gifts:

A donor can give as many gifts of up to the value of £250 during the tax year as long the above exemptions have not been used on the same person.

Why do HMRC tax gift’s made to family members?

HMRC have outlined tax-exempt gifts as outlined above, however, HMRC has stipulated thresholds to stop wealthy individuals from offloading their wealth and assets to family members before the end of their life without paying any form of inheritance tax.

What is Inheritance tax?

Inheritance tax is the tax on an individual’s assets and wealth, this is payable on the death of an individual who has an estate worth more than £325,000. Any estate above this value will be taxed at 40%.

The 7year rule

Any gift provided above the exemption threshold is classed as a ‘potentially exempt transfer’ (PET). This means if the donor of the gift dies 7 full years after the date of the gift, the donee will not be liable to pay any tax as this would be tax-exempt.

If the donor dies less than 7 years from the date of the gift then inheritance tax would apply. The rate of inheritance tax would be determined based on how many years after the date of the gift the donor dies.

If the donor dies 3 years before the date of the gift, inheritance tax would be payable at 40%.

If the donor dies between 3-7 years from the date of the gift, the inheritance tax rate would be based on a scale known as ‘taper relief’.

Taper relief rates are as follows:

  • 3-4 years = 32%
  • 4-5 years = 24%
  • 5-6 years = 16%
  • 6-7 years = 8%


Note: Under the current inheritance tax rules the threshold of £325,000 can be increased to £500,000 by utilising the ‘residence nil rate band’ (RNRB) of £175,000, this is only applicable if the deceased donor is leaving behind a property they own to their children, (including foster, adopted, stepchildren and grandchildren) as long as their estate is worth less than £2m.

Special rules

Any transfer between spouses or civil partners is fully exempt from inheritance tax as long as the spouse or civil partner lives in the UK permanently.

If the estate value is less than the individuals own threshold i.e., £325,000 or £500,000 as outlined above, and is married or in a civil partnership then any unused thresholds can be transferred to the partner’s threshold when one partner dies, affectively increasing the threshold for the other partner/widow(er) to the unused proportion of up to £1m.

Disclaimer: The above information is for general guidance only and does not apply to everyone. Thus, rates, allowances and threshold may differ dependent on case law, government changes and case-by-case basis. Fazlanie Financial Accountants does not accept any form of responsibility or liability if the above information is acted upon without prior written consent for your situation.