Are you thinking of gifting your loved ones with a substantial amount? Then it’s important to consider the laws surrounding gifts and inheritance tax. In this article we will explain when inheritance tax is payable on gifts that you give, what exactly counts as a gift for these purposes, and what you could do to minimise inheritance tax on gifts to children or grandchildren.

How inheritance tax works

Inheritance tax is payable by the beneficiaries of your will. These are the people who inherit your estate, often your children or grandchildren. (If you are married or have a civil partner, your spouse will be exempt from paying inheritance tax.)

If your estate is worth more than £325,000, inheritance tax is payable on anything over that threshold. If you are bequeathing your home to your children or grandchildren, the threshold increases to £500,000, as long as your estate is worth less than £2,000,000 in total. So the inheritance tax on gifts to children can be minimised.

Some people get around paying inheritance tax by giving gifts while they are still alive. For example, you might sign over a property to your son or daughter, rather than waiting for them to inherit it. But it’s important to know that inheritance tax on gifts to children, grandchildren, or anyone who is not your legal spouse, will still be payable if you die within 7 years of giving the gift.

What is gift tax exemption and what does it mean for me?

Gift tax exemption is a yearly allowance that allows you to give gifts up to a certain value, without inheritance tax being due. As long as you stay below this threshold, inheritance tax will not be payable on your gifts, even if you die within 7 years.

So, how much money can you gift? The gift tax exemption currently stands at £3,000. You can give gifts up to this amount every year, whether that’s one lump sum or shared out between several people.

What counts as a gift for inheritance tax purposes?

We often think of inheritance tax on gifts as applying only to money or property. But the tax also applies to any items that have value – including:

  • Jewellery
  • Antiques
  • Stocks and shares

Inheritance tax on gifts to children can also apply in ways you may not have realised. For example, you might decide to sell your property to your child for less than its market value. Say your property is valued at £500,000 and you sell it for £200,000. The money you lose – that £300,000 difference – is classed as a gift and will be taxed accordingly.

Understanding the 7 year rule

We’ve seen how inheritance tax on gifts is payable if you die within 7 years of making the gift (as long as it is worth more than the gift tax exemption threshold amount). This is called a potentially exempt transfer.

The more time that elapses between the gift being given and your death, the less tax your beneficiaries will need to pay:

  • Gifts given 3 years or less before your death are subject to 40% inheritance tax
  • Gifts given between 3 and 7 years before your death have ‘taper relief’ applied to the total tax liability, on a sliding scale.

There are some exceptions to the 7 year rule: 

  • If the gift is part of a trust, it may be treated differently and it’s important to seek advice on your own particular circumstances.
  • Some assets, such as property in a country outside the UK, count as ‘excluded property’ and inheritance tax is not payable.

Get advice from an inheritance tax specialist

Understanding the laws around inheritance tax on gifts can be complicated, and an inheritance tax specialist can help you to plan the most efficient way to give away your assets. For an appointment with our inheritance law experts, contact us at or call 01727 858807.

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