A potentially exempt transfer is exactly that. If the person making the gift lives survives it for 7 years, the value is excluded from the donor’s estate for inheritance tax (IHT) purposes.
If the donor dies within the 7 year window, IHT is chargeable on a tapered basis as below. A reduction in value is also classed as a gift, for example, if a house is sold to a child for less than market value, the difference is classed as a gift. Gifts between spouses are always exempt.
Other gifts exempt from IHT
|
Years from gift to death |
Tax paid |
|
<3 years |
40% |
|
3-4 years |
32% |
|
4-5 years |
24% |
|
5-6 years |
16% |
|
6-7 years |
8% |
|
>7 years |
0% |
Each tax year, you can make up to £3,000 worth of gifts under an annual exemption. In addition to this, you can also give away as many gifts as you like of up to £250 per person per tax year.
Other exemptions include:
- Wedding gifts up to £1,000 (£2,500 for grandchild, £5,000 for child)
- Normal gifts out of income, for example, birthday or Christmas presents, the cost of which does not affect your standard of living
- Gifts to charity/political parties
- Payments towards the living costs of others such as children/elderly relatives.
Kathy Harris
February 2020
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