Gifting can play a valuable role in personal and family financial planning, allowing individuals to support loved ones, charitable causes and political parties, whilst potentially reducing the value of their estate. However, many people are unaware that gifts can carry potential tax implications if they are not structured correctly.
The UK tax system includes specific rules on gifting, particularly in relation to Inheritance Tax (IHT), exemptions and the seven-year rule. In this article, we explain HMRCs rules on gifting, highlighting what is considered to be a gift and how the exemptions work, helping you plan with confidence and clarity.
What do HMRC consider to be a gift?
HMRC considers a gift to be any transfer of value, meaning anything that has monetary worth, that is given away without receiving full value in return, including:
- Money.
- Property or land.
- Household and personal items (e.g. furniture, jewellery and antiques).
- Stocks and shares trader on an exchange.
- Unlisted shares that have been held for less than two years before your death.
The above gifting rules can also come into play if an asset is intentionally sold at a loss. For example, if you sold your house to a family member for less than its market value, the difference in value would count as a gift.
Understanding how different types of gifts are treated for tax purposes can help you plan your finances more efficiently and avoid unintended tax consequences.
It is important to note that anything left through your will forms part of your estate and is not treated as a gift. Your estate includes all money, property and possessions you own at the time of death, and its total value is used to determine whether Inheritance Tax is payable.
What is the Annual Gift Allowance?
Each individual in the UK has an annual gift allowance of £3,000, meaning that you can gift up to this amount each tax year without any tax implications. This £3,000 can either go entirely to one person or can be split between multiple people, which is known as your ‘annual exemption’.
If you do not use your full annual exemption in one tax year, you are able to carry it forward to the following tax year. However, unused allowances can only be carried forward for one tax year. After that it expires.
Example:
- 2024/25 tax year: You use £0 of your £3,000 allowance.
- 2025/26 tax year: You can gift £6,000 (£3,000 for 2025/26 + £3,000 carried forward from 2024/25).
- If you do not use the carried-forward allowance in 2025/26, it will expire.
For couples, the annual allowance can be combined, allowing them to gift up to £6,000 per year tax-free.
Additionally, gifts between spouses or civil partners are not subject to Inheritance Tax, meaning you can give them as much as you like during your lifetime, provided they fall within the following criteria:
- They live in the UK permanently.
- They are legally married or in a civil partnership with you.
Can I make regular payments from surplus income?
Gifting money regularly to another person, for example to help with living costs, is acceptable and exempt from any form of tax, provided that the payments come from your regular monthly income and is truly surplus (the gift does not impact your own standard of living).
This is known as normal expenditure out of income, and can include:
- Paying rent for your child.
- Paying into a savings account for an under 18.
- Financially supporting an elderly relative.
Regular payments to the same person can be used in combination with any other allowance, except for the small gift allowance.
For example, you can regularly gift £100 per month to your child to assist with their rent (a total of £1,200 per year) and still utilise the full £3,000 annual exemption in the same tax year.
Are there any small gift exemptions?
In addition to the annual allowance, you can give as many gifts as you like up to the value of £250 per person each year without being subject to IHT, provided that the individual receiving the gift has not received a portion of your £3,000 annual allowance.
Are there rules for wedding or civil partnership gifts?
HMRC allows for the giving of larger gifts for weddings or civil partnerships, however the amount you can gift is dependent on the relationship to the recipients.
- Parents: Up to £5,000 to a child.
- Grandparents or great-grandparents: Up to £2,500.
- Any other individual: Up to £1,000.
It is possible for wedding gifts to be given in combination with other allowances, with the exception of the small gifts allowance.
For example, if your child is getting married, you can combine the £5,000 allowance for wedding gifts with the £3,000 annual allowance to gift up to £8,000.
Can I gift to charities or political parties?
Any gift made to UK-registered charities or qualifying political parties are completely exempt from Inheritance Tax.
Potentially Exempt Transfers (PETs)
If a larger gift to an individual exceeds your annual exemption of £3,000, it will be treated as a Potentially Exempt Transfer (PET).
PETs become fully exempt from Inheritance Tax if you survive for seven years after making the gift, which is commonly known as the Seven Year Rule.
It is important to note that this section refers solely to gifts to individuals. Certain gifts, including those into a discretionary trust or to a company, are considered Chargeable Lifetime Transfers (CLTs) and are subject to a different set of rules.
What is the Seven Year Rule?
If you were to pass away within seven years of making the gift to an individual, the gift may be subject to Inheritance Tax, with the rate of taxation dependent on when the gift was made relative to your passing.
- Gifts given within the three years leading up to your death are taxed at the full IHT rate of 40%.
- Gifts given between three to seven years prior to your passing could be subject to ‘taper relief’ which is effectively a slowly reducing scale of taxation.
It is important to note that taper relief only applies if the total value of gifts given in the seven years preceding your death is over the £325,000 tax-free nil-rate band.
| Years between gift and death | Tax rate on the gift |
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more | 0% |
How is Inheritance Tax on a gift paid?
Any Inheritance Tax due on gifts is typically paid by the estate (money, property and possessions left when you pass away), unless you have gifted more than £325,000 in the seven years before your death.
Once you have gifted more than £325,000 worth of qualifying gifts, anyone who receives a gift from you within those seven years will typically have to pay Inheritance Tax on their gift.
For example:
An individual passed away who was not married or in a civil partnership.
They gave four gifts in the last ten years of their life:
- £25,000: Ten years before they died.
- £25,000: Nine years before they died.
- £325,000: Four years before they died.
- £100,000: Three years and three months before they died.
As a result, no Inheritance Tax would be due on either of the £25,000 gifts as they were given more than seven years prior to the individual passing away.
In addition, no Inheritance Tax would be due on the £325,000 as the value of this gift is within the Inheritance Tax threshold.
However, the £100,000 gift would be subject to Inheritance Tax at a rate of 32% (as per the Seven Year Rule). This is due to the gift being above the tax-free threshold and was made within three years of the individual’s death.
This would result in £32,000 of Inheritance Tax being due on the £100,000 gift.
Does Capital Gains Tax (CGT) apply to gifting?
Typically, gifts are considered under IHT rules. However, Capital Gains Tax (CGT) may also apply when gifting certain assets, such as property or shares.
If these assets are gifted to someone other than a spouse or civil partner, CGT may be due on the amount between the value of the asset when initially acquired and the value of the asset when gifted.
The annual Capital Gains Tax (CGT) allowance is currently £3,000, meaning you only pay CGT on gains above this amount. Any taxable gain that exceeds the allowance is charged at 18% for basic‑rate taxpayers, or 24% for those who fall into the higher or additional‑rate tax bands.
For example, if a property was bought for £100,000 and is valued at £120,000 when gifted, the gain is £20,000. If your full annual allowance remains available, this reduces the taxable gain to £17,000, and CGT would be calculated on that amount.
In addition, it is possible for a spouse or civil partner to transfer assets without triggering CGT charges, but gifts to children or other family members may be subject to tax.
Keeping records of your gifts
To avoid any unnecessary tax bills or complications, it is advisable to keep record of all gifting, including:
- What you gifted (e.g. property, land, jewellery).
- The monetary value of the gift.
- The date the gift was given.
- The relation and name of the recipient.
- Whether the gift was given from income or capital.
- Any expectations applied.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
How can Cooper Associates Wealth Management help?
Understanding HMRC’s rules on gifting can help you plan your finances effectively, but tax regulations can be complex. This makes seeking professional financial advice essential to ensure you maximise tax efficiencies while supporting your loved ones.
At Cooper Associates Wealth Management, our team of expert advisers pride themselves on providing holistic, bespoke advice that is tailored to your personal circumstances, helping to ensure you feel informed and confident when making gifting decisions while minimising tax liabilities.
Get in touch today to discuss how we can support your estate planning goals and help you to take control of your finances.
FAQs
- Can I give my house to my children to mitigate Inheritance Tax?
Yes, but if you continue living in the property without paying market rent, HMRC will still consider it part of your estate for IHT purposes. This is termed as a ‘gift with reservation’.
- Do I need to report gifts to HMRC?
Generally, it is not a requirement to report gifts to HMRC unless Inheritance Tax is due. However, keeping accurate records is recommended in case HMRC require evidence regarding any gifts you have made.
- What happens if I give more than £3,000 in a year?
Anything above the £3,000 annual exemption is considered a Potentially Exempt Transfer (PET) and could be subject to Inheritance Tax if you die within seven years.
The annual allowance also covers Chargeable Lifetime Transfers (CLTs), which is a gift made during a person’s lifetime that will immediately be subject to Inheritance Tax if its value exceeds the nil rate band.
For personalised advice, contact Cooper Associates Wealth Management today.
