lifetime gift being given as part of inheritance tax planning
Couple who are exempt from inheritance rules in the UK
School that parents paid the fees for
Lady giving a small gift to a friend
Couple on their wedding day
Christmas presents as an annual exemption in inheritance tax planning

5. Annual exemption

Lifetime gifts will not be subject to inheritance tax if they fall below the total threshold of £3,000 per tax year. This rule will help if you currently or intend to make gifts for birthdays and Christmas, which exceed £250 to an individual over one tax year. 

This threshold applies to the total gifts given by the donor in any one single tax year, it’s not a threshold that applies to each person to whom you give gifts. 

You can also carry over any unused amount of your annual exemption to the next tax year. Meaning that if you do not give any gifts in one tax year, you can provide gifts totalling up to £6,000 in the next tax year without any inheritance tax consequences.  

Charity receiving a gift from a donor

Anti-avoidance rules relevant to inheritance tax planning 

There are specific rules applicable to lifetime gifts or structuring put in place which can disrupt these exemptions from applying. They are complicated, and if you are concerned about whether they may apply to your situation, then you should always seek legal advice. The rules are summarised briefly, as follows: 

  1. Gifts with reservation of benefit: These rules apply where the donor ‘gives away’ an asset, but the donor retains the whole or some part of the benefit from the property. A helpful example may be ‘giving away’ a painting, but it remains hanging in your property, or even making a gift of your house but retaining occupation of part of it. If these rules apply, the asset is considered to remain part of the donor’s estate and will be taxed as such. 
  2. Pre-owned assets: These rules apply where an individual gives away property (which is defined to include land, buildings, chattels, money and investments) and subsequently benefits from the gifted property. This is a charge to income tax, and there will be a market-based ‘rent’ applied to the asset on which income tax is payable.

What about when gifts don’t fall within any of these exemptions?

If no exemption applies to a lifetime gift, it does not mean that inheritance tax is payable straight away.

Regardless of the nature of the gift, it’s likely the 7 years tapering rule will apply, so if the person who gave the gift lives for longer than 7 years, the gift will likely not incur inheritance tax.