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IHT gifting exemptions

Certain gifts may be free of IHT. Exemptions may apply to lifetime gifts only or in certain cases they may also apply to gifts made on death.

Lifetime gifts only

Annual gift exemption

• For gifts up to £3,000 each tax year
• Can be carried forward for one tax year only. The current year's exemption will be used before any amount carried forward (a couple who have not used the exemption in the current or previous tax year could make exempt gifts of £12,000)
• Cannot be combined with the small gifts exemption to make an IHT free gift of £3,250

Small gifts exemption

• Gifts of up to £250 can be made to any number of people in the same tax year
• Must be an outright gift, not to a trust
• If the total of gifts made in the tax year to the same person is more than £250, this exemption cannot apply at all

Normal expenditure out of income

• Gifts must form part of normal expenditure
• Gifts must be made out of income
• Donor must be left with enough income to maintain their usual standard of living (see below for more detail)

Gifts in consideration of marriage or civil partnership

• Usually made before the marriage or civil partnership takes place
• Each parent can give £5,000
• Each grandparent can give £2,500
• Any other person can give £1,000

Gifts for education and maintenance

• Lifetime transfers to a current or former spouse or civil partner or a dependent relative for their maintenance are not subject to IHT
• Payments for a child's maintenance, education or training

Exempt gifts made during lifetime or on death

• Gifts between UK domiciled spouses and civil partners. Special rules apply if the gift is from a UK domiciled to a non-domiciled spouse (see below)
• Gifts to charities and political parties
• Gifts for national benefit, such as to museums, universities, libraries or the National Trust

Gifts between spouses and civil partners

Gifts between spouses and civil partners are generally free of IHT provided that the recipient of the gift is UK domiciled or deemed domicile. Unlike the CGT spousal exemption, spouses do not need to be living together at the time of the transfer. The exemption still applies where the parties are separated but continue to be legally married or remain in a registered civil partnership.

Gifts to a non-dom spouse

When a UK domiciled (or deemed domiciled) individual makes a gift to their non-UK domiciled spouse or civil partner, the IHT spouse/civil partner exemption is limited.

Alternatively, the non-UK domiciled spouse can elect to be treated as UK domiciled for IHT purposes. This election allows them to use an unlimited spouse exemption.

Limited spouse exemption

The limited exemption is a cumulative amount equal to the standard IHT nil rate band. Prior to 5 April 2013 the limit was a cumulative total of £55,000.

This is a lifetime cumulative total which applies to both lifetime transfers and those made on death. Unlike PETs and CLTs which fallout of the cumulative total for IHT after seven years, gifts to a non-dom spouse will continue to use up the exemption whenever they were made.

Gifts which exceed the lifetime exemption will be PETs.

The limited spouse exemption does not apply if:

• both the transferor and their spouse or civil partner is domiciled outside the UK. In this situation, each would only be subject to IHT on their UK based assets and the spouse/civil partner exemption would be unlimited in respect of the transfer of any UK assets, or
• the transferor is domiciled outside the UK but the spouse or civil partner is domiciled in the UK. Again, the transferor in this situation would only be subject to IHT on their UK based assets, for which they would have an unlimited spouse/civil partner exemption.

Domicile election

A non-UK domiciled spouse/civil partner can make an election to be treated as UK domiciled. This would entitle them to the full unlimited spousal exemption.  However, the cost to the non-UK domiciled spouse would be that the election would bring their overseas assets into the UK IHT net.  It is also possible for the non-UK domiciled spouse to make the election in the two years after the death of the UK domiciled spousee .

Changes to the taxation of non-UK domiciles

At the Autumn Budget, the Chancellor confirmed that the abolition of the remittance bais and removal of the concept of domicile for tax purposes will go ahead from 6 April 2025. This is to be replaced with a new Forgein Income and Gains (FIG) regime which is determined by UK residency rather than domicile.

Individuals who become UK resident having  been non UK-resident for more than 10 years will not pay UK tax on their overseas income and gains for the first four years of UK residence and will be free to bring these funds to the UK free of additional tax. They will continue to pay tax on their UK income ans gains in the normal way.

Currently someone who is non-UK domicile is only subject to UK IHT on assets situated in the UK. However, they become subject to IHT on their worldwide assets if they become UK domicile or deemed domicile.

From 6 April 2025, IHT will apply on worldwide assets where someone is deemed to be long-term resident. This is typically where someone  has been resident in the UK for more than 10 years in the last 20 years.  Where someone ceses to be UK resident they will remain subject to IHT for up to 10 years after leaving the UK.

The IHT changes will also impact excluded property trusts with the settlor's long term residence status at the time off any IHT charge rather than their domicile status at outset being the determining factor on which IHT may be due. 

Regular gifts of surplus income

The normal expenditure out of income exemption allows the donor to make a series of IHT effective gifts from surplus income. There is no monetary limit to this exemption so the size of the exempt gift is only limited by the amount of the donor's surplus income. To qualify for the exemption, the gifts must:

• form part of normal expenditure (a regular pattern of gifting)
• be made out of income
• leave the donor with sufficient income to maintain their usual standard of living

Normal expenditure

The gifts must form part of a habitual pattern of gifting. This can be shown from the history of gifts actually made by the donor. Alternatively, where there is no such history, the exemption may still be claimed where it can be shown that the donor had made a commitment to future gifting.

There is no defined period for the length or the pattern of gifting in order to satisfy the condition. For example, a commitment to pay regular premiums to a life assurance contract could be satisfied merely by paying the first premium. Where the commitment is less clear cut, HMRC will typically look at a period of three to four years to establish a regular pattern of gifting.

Gifts do not have to be made to the same recipient every year provided they are paid to recipients within the same class, for example children or grandchildren. The amount of the gifts will typically be of comparable size but where an exceptional gift is made, the exemption may still apply up to the value of the previous gifts, with the excess falling outside of the exemption.

Income

Gifts must be made from current net income and not capital. Income for the purposes of the exemption does not follow what is defined as income for income tax. Instead it follows the normal accountancy rules. This is broadly income received from employment or pension, the natural yield from investments such as interest or dividends (not accumulated income) and income derived from assets such as rental income.

Certain income which isn’t subject to income tax, such as income from ISAs, may still be covered by the exemption. Also pension drawdown withdrawals, including any tax free cash element, are also treated as income for this purpose. It still must satisfy the other conditions to qualify. For example, stripping out all the tax free cash and gifting it over a couple of tax years would typically fail to establish a regular pattern of gifting. However, spreading this over a longer period of say 10 years is much more likely to satisfy the exemption.

Some examples of allowable income include:

• salary
• self employed earnings
• dividends
• savings interest
• pension annuities and income from defined benefit schemes
• regular withdrawals from flexible pensions, including any tax free cash element
• ISA income
• rental income
• trust income

HMRC deem that withdrawals from investment bonds are capital in nature even though any gains are subject to income tax through the chargeable events legislation. Consequently bond withdrawals cannot be used to increase the amount of surplus income which can be given away.

Usual standard of living

After making gifts, the donor should be left with enough income to maintain their usual standard of living. If they have to resort to capital to maintain their lifestyle the exemption may be lost or limited.

The usual standard of living will generally be the standard at the time of making the gift. However, where unexpected circumstances cause a change to their standard of living, for example, unemployment or a sudden requirement for residential care, the exemption may not be lost even if they do have to make future gifts from capital. Also, where unexpected circumstances mean that changes in the donor's standard of living provide increased surplus income, this too may be gifted using the exemption.

Record keeping

The exemption is claimed following death of the donor by the personal representatives (PRs) completing HMRC form IHT403. It is helpful to the PRs if the donor can keep records of gifts made, with details of their income and expenditure, using the form during their lifetime.

Gifts into certain types of trust which are chargeable lifetime transfers may need to be reported to HMRC on Form IHT100. For regular gifts from surplus income, it should be assumed that the exemption does not apply when establishing whether the gifts exceed the relevant reporting limits. If this would mean an IHT100 is required, it should be sent to HMRC so that the availability of the exemption can be agreed.

Taper relief

Gifts which are chargeable lifetime transfers (CLTs) or potentially exempt transfers (PETs) may be subject to IHT if the donor dies within seven years of making the gift. Inheritance tax taper relief may reduce the amount of inheritance tax payable on lifetime gifts where:

• death occurs between three and seven years from the date of the gift, and
• the value of the gift, when added to any other gifts in the previous seven years, exceeds the nil rate band (NRB) in the year of death,

On death any PETs made within seven years of death will become chargeable transfers and any CLTs made during the same period will be reassessed for IHT. Each chargeable transfer will have its own seven year cumulation that will determine the amount of nil rate band available to it.

Any lifetime transfers made within the seven years of death will have first use of the NRB (oldest first) before the rest of the estate. For this reason, there will be no taper relief if the total of lifetime gifts is less than the NRB as there will be no tax to relieve. Where IHT is payable on lifetime gifts taper relief may apply based on the following scale:

Business property relief

Business property relief (BPR) is available for transfers of business property during life or on death. The relief reduces the value for IHT of the business asset transferred. The business property must usually have been owned throughout the two years prior to the transfer. BPR is given at different rates depending on the asset.

100% relief is available for:

• a business or interest in a business (includes sole traders and partnerships)
• a holding of shares in an unquoted company (including Alternative Investment Market (AIM) companies)

50% relief is available for:

• controlling holding of shares in a quoted company (more than 50% of the voting rights)
• land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership

Ownership period

For BPR to apply the assets must have been owned for the two years prior to the transfer.

However, where a widow(er) inherits business property on the death of their spouse, the second spouse’s ownership period for BPR is deemed to commence when the first spouse acquired the asset.

The two year ownership period is also relaxed where business property is sold and new business property is acquired. Provided the proceeds from the sale are used to purchase replacement property with three years the new business property will immediately qualify for relief.

Investment business

BPR is not available if a business consists wholly or mainly of dealing in securities, stocks and shares, land or buildings, or making or holding investments, including shares in a company which carries on such a business. This generally includes landlords with property for rent. Furnished holiday lets will not usually qualify for BPR but there may be cases where the level of additional services provided is so high that the activity can be considered as non-investment. Specialist advice is required.

Excepted assets

No relief will be given on the value of excepted assets. These are assets that have not been used wholly or mainly for the purpose of the business throughout the two years before the transfer and are not required for the future use of the business. A typical example would be large reserves of cash in excess of any reasonable business requirements.

Lifetime gifts of BPR assets

Lifetime gifts of business property may benefit from BPR provided the asset was owned by the donor throughout the two years before the transfer. However, relief can be withdrawn if the donor dies within seven years of making the gift and the recipient no longer owns the asset or the asset no longer qualifies for BPR.

Gifts of business assets between spouses will be covered by the spousal exemption and do not rely upon BPR. Therefore should the donor die within seven years, the surviving spouse does not need to retain the asset for the original transfer to remain exempt.

Agricultural property relief

Agricultural property relief (APR) is available for transfers of relevant property made either during life or on death. The relief is usually given at a rate of 100% of the value of the asset (with no monetary limit) but may only be at 50% if the agricultural property was rented out before 1 September 1995.

Agricultural property is land or pasture that is used to grow crops or to rear animals intensively. It can also include stud farms, farm buildings, farm cottages and farmhouses. The agricultural property must be located in the UK, Channel Islands, Isle of Man or the European Economic Area, and it must be part of a working farm. The donor must have owned it for two years before the transfer or seven years if it is property that is let out to someone else for agricultural purposes.

From  6 April 2024 agricultural property relief is restricted to assets situated in the UK. 

Farm equipment and machinery, harvested crops and livestock do not qualify for APR.

APR may be lost if the donor dies within seven years of giving away agricultural property and the recipient no longer owns it or does not use it for agricultural purposes. The relief is also lost if a binding contract for sale exists at the time of transfer.

This is a complex area that requires specialist advice.

As announced in the Autumn Budget 2024, from April 2026 only the first £1M will get 100% relief on the combined value of qualifying agricultural and business property. For qualifying assets over £1M, relief will be given at 50%, resulting in an effective rate of 20%.

Shares which aren't listed on recognised stock exchange, including AIM shares, will be subject to relief at 50% on the entire holding and will not count against the £1 million allowance. 

The new rules will also apply to lifetime transfers from 30 October 2024. This means a gift of AIM shares before 2026 will be a failed PET if the donor does not survive for seven years and relief will be restricted to 50%.