Navigating gifting allowances in the UK

In the UK, there are several gifting allowances that can be leveraged to mitigate inheritance tax and support loved ones during one’s lifetime.

Gifting allowances are provisions within UK tax law that allow individuals to give away certain amounts of money or assets without incurring tax liabilities. These allowances are particularly useful for reducing the size of an estate, thereby potentially lowering future inheritance tax (IHT) liabilities.

Key Gifting Allowances

1. Annual Exemption
   Each tax year, individuals can gift up to £3,000 without it being added to the value of their estate for IHT purposes. This is known as the annual exemption. If the previous year’s annual exemption was not fully used, it can be carried forward, allowing for a maximum gift of £6,000 in one year
2. Small Gifts Exemption
   In addition to the annual exemption, individuals can make unlimited small gifts of up to £250 per recipient each tax year. These small gifts cannot be combined with the annual exemption for the same person, but they are an excellent way to give modest amounts to a larger group of people without any tax consequences.
3. Wedding and Civil Partnership Gifts
   Gifts given on the occasion of a wedding or civil partnership enjoy additional exemptions. Parents can gift up to £5,000, grandparents and great-grandparents up to £2,500, and other individuals up to £1,000. These gifts must be made on or shortly before the event to qualify for the exemption.
4. Regular Gifts from Income
   Regular gifts made from surplus income can also be exempt from IHT. These gifts must form part of a pattern of regular giving and must not reduce the giver’s standard of living. Proper documentation is essential to demonstrate that these gifts are made from income rather than capital.
5. Potentially Exempt Transfers (PETs)
   Larger gifts that do not fall under the aforementioned exemptions are considered potentially exempt transfers. If the donor survives for seven years after making the gift, it becomes exempt from IHT. If the donor dies within this period, the gift will be included in the estate, and IHT may be due, although taper relief can reduce the tax payable on gifts made between three and seven years before death

The 7-year rule and taper relief

No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7-year rule. If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it. Gifts given in the 3 years before your death are taxed at 40%. Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Taper Relief:

•    Gifts made in the 3 years before death are taxed at 40%
•    Gifts made 3-4 years before death are taxed at 32%
•    Gifts made 4-5 years before death are taxed at 24%
•    Gifts made 5-6 years before death are taxed at 16%
•    Gifts made 6-7 years before death are taxed at 8%
•    Gifts made 7 years or more before death are not taxed

Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.

Please contact your Dentons Wealth financial adviser to see how these rules might apply to your estate.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.