What is Inheritance Tax Planning and How to Give Tax-Free Gifts?

Inheritance tax gifts

The wise use of inheritance gifts can save you and those persons, who inherited the gifts after your demise, from the heavy inheritance taxes. In this blog, we will guide you on how you can get or give tax-free gifts. Giving gifts as inheritance or will is liable to capital gain tax or inheritance tax. However, there are some cases where only capital gains tax will be charged. So, it is very crucial to consider the different types of cases like

  • Whom you are giving gifts?
  • What is the worth or the value of the gift
  • When you are giving a gift?

Giving accurate answers to these questions can help you determine if the gift is tax-free or you have to pay a certain amount of tax. Let’s discuss inheritance tax in detail!


If you need help in tax compliance and require tax advice, feel free to contact our team of experts at AccountingFirms in the United Kingdom. We would love to help you.


What is Inheritance Tax?

When someone passes away due to some unfortunate event, the person leaves behind his money, possessions or other belongings. Not all the estates have to pay the inheritance tax until the total worth of the estate is equal to £325 000. If the value of all possessions crosses this threshold, the inheritance tax will be applicable.

Besides, if the inheritance tax is taken into account at the time of preparing a will, it will greatly help the owner of the property or to whom the property is being transferred about the IHT.


How Much Inheritance Tax is Applicable?

The rate of Inheritance tax is 40% if the estate is large enough to cross the threshold of £325 000. On the other hand, this rate can be reduced further to 36% if the 10% of the estate has been gifted to a charity.

In other words, if the total worth of your estate is less than the mentioned threshold, then the estate owner or the inheritors would not pay the IHT. However, if the estate is large, then the tax is applied to the part above the tax-free threshold.


Tax-Free Inheritance or Gifts

However, there are certain cases where the government or the law of the United Kingdom allows tax-free gifts. These cases of no tax are as follows:

  • The total worth of your estate is less than the prescribed threshold of £325 000.
  • Your spouse or civil partner is entitled for the estate after your demise or you have gifted them your estate above the threshold.
  • You have given your estate to a charitable institution or the sports club.
  • If you have given your home to your children or the grandchildren, the threshold of tax-free inheritance is increased from £325 000 to £500 000. So, you have to pay the inheritance tax above the new threshold of £500 000.


Inheritance Tax Allowances

You can avoid inheritance tax if you give the gifts or your possessions to someone using the inheritance allowances. Let’s briefly discuss these allowances!

1. Annual Exemption Allowance: You can use the threshold of giving a gift worth of £3 000 each tax year. If you have not used this allowance in one tax year, it can be carried forward to the next tax year, increasing the threshold ultimately. This amount you can give to one person to distribute the small amounts among many people, but the end total must be equal to the annual threshold.

2. Small Gift Allowance: If you give many gifts to a number of people up to the value of £250, you can avoid the inheritance tax. However, you do not need to pay inheritance tax if you pay for the birthday or Christmas gifts out of your regular income.

3. Wedding or civil partnership gifts or allowances: This allowance is different for every person depending on the relationship you have with them. For example, the allowance is

  • £5 000 to a child getting married
  • £2 500 to the grandchildren getting married or going to be a civil partner
  • £1 000 to any other person

4. Regular Payments: You can pay regularly to someone to help them out of your monthly income. This allowance is applicable as long as you are able to meet your expenditures and those of the person in need. For example, you can assist your child in his/her finances by paying the rent or an elderly relative or a child under 18.

5. Rule of 7: The rule of seven allows a person to give a tax-free gift if the seven years have passed after giving a gift. On the other hand, if the gift has been given before the three years of your death, the inheritance tax of 40% will be paid.

However, a “taper” relief” will be applied if the gift has been given between the three to seven years before you passed away.

6. A Gift With Reservation: If you have gifted your possession like your home or painting and you are still using it. It will be considered a part of your estate.



To wrap up, we can conclude that inheritance tax as heavy as 40% of the total estate’s value can be lowered to zero if you learn all the ins and outs of this complex procedure. However, you can get help from an expert who will guide you on this complicated process of inheritance tax.

So, if you learn yourself what inheritance tax is, you can gift someone while enjoying the Inheritance allowances up to the maximum. So, it is crucial to understand whom you are gifting, when and how much to avoid any taxes and enjoy the allowances. One thing to remember is you cannot use the small gift allowances on the same person in one tax year.


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Disclaimer: All the information provided in this article on Inheritance Tax Gifts including all the text and graphics is general in nature. It does not intend to disregard any of the professional advice.