UK Inheritance Tax Gift Rules: Rules, Allowances, and Exceptions Explained

Gifting money, property, or other assets to family members can have inheritance tax implications in the UK. Depending on the type, value, and timing of the gift, it may count as part of your estate for inheritance tax (IHT) purposes.

This guide explains the UK inheritance tax gift rules to help you understand the implications of gift-giving on your loved ones and your estate. You’ll learn: 

• Who pays the inheritance tax on gifts in the UK, and how much 
• Which gifts are exempt from the tax
• What are the UK inheritance tax gift allowances you can use
• How to incorporate gifts in your estate planning to protect them from IHT

UK Inheritance Tax: An Overview

The UK inheritance tax is a tax levied on a deceased person’s estate. An estate includes all of the deceased person’s possessions at the time of their death, such as: 

• Balance in savings accounts
• Real estate
• Stocks, shares, and other investments 
• Private stocks and business interests
• Personal possessions
• Unused portions of pensions (in certain cases)
• Overseas assets, for UK long-term residents 

In addition to assets with positive value, an estate can also include liabilities, such as credit card debt or mortgages. When determining inheritance tax liability, both assets and debts are taken into account.

The IHT is charged before any parts of your estate are passed on to the beneficiaries. It’s applied to the taxable portion of the estate’s value, which is the portion above the tax-free thresholds:

Type of Threshold	Description	Value
Nil rate band	Tax-free threshold for all estates	GBP 325,000
Residential nil rate band	Additional tax-free threshold for main residences of the deceased	GBP 175,000

In practice, this means that only estates valued at more than GBP 325,000, or GBP 500,000 if they include a residence, are liable for inheritance tax. The tax is settled by the estate executor.

The inheritance tax rate in the UK is 40%. You can reduce it to 36% if you bequeath at least 10% of your property and assets to charitable causes. 

In certain cases, the inheritance tax isn’t charged at all. You can pass your estate to your spouse or civil partner without incurring any tax liabilities. Other forms of relief allow certain types of assets, such as those used by a business or agricultural land, to be either exempt or taxed at a reduced rate.

UK Inheritance Tax Rules for Gifts

Under certain circumstances, the gifts you make during your lifetime will be considered a part of your estate when determining the UK IHT liability. Such gifts can be in the form of money, personal or household items, property, or shares, among others.

Like other types of taxable assets, gifts can count towards the nil rate band. Typically, they are taken into account before other asset classes, so they may exhaust the entire tax-free threshold. 

Types of Gifts 

When determining IHT liability, gifts can fall into three categories: 

1. Exempt gifts: Gifts to spouses or civil partners who live in the UK permanently
2. Potentially exempt transfers (PETs): Gifts made to individuals or placed into trusts for beneficiaries with a disability
3. Chargeable lifetime transfers (CLTs): Gifts to other types of trusts or companies

Exempt gifts are never subject to IHT. To determine the tax liability of PETs and CLTs, the UK inheritance tax seven-year rule is used. Under this rule, only a gift that was given in the seven years before the person’s passing can be taxed. 

A PET that was given more than seven years before the person’s passing will not be included in the estate for inheritance tax purposes. For a CLT, which is subject to a partial tax charge of 20% at the time of transfer and at certain points during the lifetime of a trust, any remaining tax liability will be cleared after seven years.

If you gift someone a PET but continue to enjoy its benefits, it will be treated as part of your estate and be subject to IHT even after seven years. This is called a gift with reservation of benefit, and it usually occurs when parents give real estate to children while continuing to reside in it. 

To make the gift eligible for tax exemption under the seven-year rule, it’s necessary to relinquish the benefit, which will restart the clock. 

Who Pays Inheritance Tax on Gifts in the UK?

While the liability for inheritance tax on gifts typically falls on the estate, this liability shifts to the recipient if the total value of gifts given within seven years before death exceeds the nil-rate band of GBP 325,000.

The applicable rate depends on how much time has elapsed between the gift date and the donor’s passing. This is known as taper relief, and it applies a sliding scale to the UK inheritance tax liability:

Years Before Death	Tax Rate
Fewer than three	40%
3–4	32%
4–5	24%
5–6	16%
6–7	8%
Seven or more	0%

A common method to protect recipients from inheritance tax liability on the PETs made within seven years of death is to take out a gift inter vivos life insurance policy. This policy will cover the potential tax liability in line with the taper relief schedule until the liability reaches zero under the seven-year rule.

UK Inheritance Tax Allowances for Gifts

The UK inheritance tax includes provisions that allow you to give certain gifts free of tax if they meet specific conditions. These allowances include:

1. An annual exemption
2. An allowance for small gifts
3. Gifts for weddings and civil partnerships
4. Regular payments from your monthly income

1. Annual Exemption 

You are allowed to gift up to GBP 3,000 each year completely free of IHT, meaning it won’t count towards your estate value. 

This amount can be spread across as many gifts as you want, provided their total value doesn’t exceed the limit. For example, if you have three children, you cannot give GBP 3,000 to each. You can, however, gift each child GBP 1,000.

Any unused portion of the annual exemption can be carried forward to the following tax year. This means that if the full GBP 3,000 exemption was not used in the previous tax year, the unused balance can be applied in addition to the current year’s allowance.

For example, if you used GBP 500 of your GBP 3,000 annual gifting allowance in the previous tax year, you would have GBP 2,500 of unused allowance available to carry forward. Combined with the current year’s GBP 3,000 exemption, this allows you to give up to GBP 5,500 free from IHT in the current tax year. 

By contrast, if you used GBP 2,500 of the exemption in the previous tax year and give GBP 4,000 this year, the excess of GBP 500 will count towards your estate and be subject to taxation under the seven-year rule. 

2. Small Gifts Allowance

In any given tax year, you are allowed to make an unlimited number of smaller gifts, provided the following conditions are met:

• Each gift doesn’t exceed GBP 250
• Only one such gift can be made per recipient in a tax year
• The recipient must not have received a gift from you under any other allowance in the same tax year

This allowance also covers holiday gifts, provided they are funded from your regular income.

3. Gifts for Weddings and Civil Partnerships

Wedding and civil partnership gifts may also be exempt from inheritance tax. The maximum tax-free amount depends on your relationship with the recipient: 

Relationship	Maximum Tax-Free Gift Value
Child	GBP 5,000
Grandchild or great-grandchild	GBP 2,500
Any other person	GBP 1,000

Unlike small gifts, a wedding or civil partnership gift can be combined with other gift allowances. This means that, for example, you can give your child GBP 3,000 under the annual exemption and an additional GBP 5,000 as a wedding gift in the same year, without either amount being subject to inheritance tax.

4. Regular Payments From Your Monthly Income

Payments made from your income are exempt from inheritance tax with no limits on their frequency or amounts, provided that the following conditions are met: 

• You must make the payments with some regularity
• The funds from the payments must come from your regular income
• The payments must not affect your standard of living 

This allowance is intended to cover arrangements such as contributing to your children’s rent, supporting elderly relatives, or building a savings account for a minor. 

While the payments must generally form part of an established pattern, it’s also possible to claim the exemption on a single payment. This usually happens when a person dies before establishing regular payments. In that case, if the estate executor can demonstrate the intent and commitment to make the payments a regular occurrence, the exemption may still be granted.

When To Report Gifts for UK Inheritance Tax

You are under no obligation to report lifetime gifts you make to individuals for inheritance tax purposes. This responsibility will fall to the estate executor after your passing. The estate executor is not required to report all the gifts you made, only those made within seven years of your passing, and the regular payments made from your income. 

Although reporting is not required during your lifetime, keeping detailed records is crucial for ensuring that only taxable gifts are treated as such. The records you should keep include:

• Dates you made the gifts
• The recipients and your relationship with them
• The value and description of the gifts
• For regular payments, the source of income and the purpose of the payment 

Gifting and Estate Planning

From an estate planning perspective, gifting can be an efficient way to reduce the value of your estate and limit the inheritance tax liability. It can also allow you to pass on wealth and provide support for loved ones during your lifetime.

Gifting is only one of several strategies available for managing IHT exposure. If you’re a high-net-worth individual with significant overseas assets, you should also consider the implications of UK long-term residence on your IHT liability.

Under the new tax laws, you can be liable for inheritance tax on overseas assets for up to 10 years after leaving the UK. To explore options for establishing a second residence in a tax-efficient jurisdiction, contact Nomad Capitalist.

Reduce Your Exposure to IHT With Nomad Capitalist

Nomad Capitalist is an advisory company trusted by over 1,500 high-net-worth individuals who rely on our services for global mobility and wealth preservation. We specialize in legal tax optimization, second residency and citizenship acquisition, and overseas investment consulting to ensure our clients’ financial and lifestyle goals are met. 

Our core service is the development of an Action Plan, a detailed document outlining the steps needed to achieve your objectives. As no two clients are alike, neither are our Action Plans—we tailor each one to our clients’ circumstances and needs.

Here’s what partnering with Nomad Capitalist looks like: 

1. We will ask you to fill out a form to help us determine whether we’re a good match 
2. We will schedule a 45-minute onboarding meeting to learn more about your situation and goals
3. Our team will create an Action Plan and present it to you for approval
4. We will implement the Plan over a 12-month period, managing all the administrative parts
5. You will continue receiving support even after the Plan is implemented

To help reduce your exposure to the UK inheritance tax, we will undertake a detailed overview of your assets and propose a tailored mitigation strategy. Whether that involves transferring assets, changing your country of domicile, or making targeted gifts, we will both advise you and manage the execution of the Plan.