Less than half of us are aware of inheritance tax gift rules

A poll carried out by HMRC has revealed that the vast majority of people gifting money or assets are unaware of the inheritance tax rules that might apply to them.

Of the 2,090 people who were questioned by the tax authority, it was found that a mere 25% who have recently given a gift were aware of the rules that applied to them. The survey also found that less than half (45%) were aware of the rules or exemptions surrounding inheritance tax when they made their largest gift.

Among those who were aware of the rules, 18% said they were influenced by them when they made their largest gift.

Only 8% of gifters considered inheritance tax rules before making their gift and just 28% sought advice from GOV.UK or a professional tax adviser.

When does inheritance tax apply to gifts?

Inheritance tax will potentially apply to gifts if a donor dies within seven years of making the gift or on a chargeable lifetime transfer into a relevant trust or company.

Should the donor die within three years of making the gift, inheritance tax of 40% will apply if the estate is worth more than £325,000.

Gifts made between three and seven years before the donor’s death are taxed on a sliding scale known as taper relief.

What counts as a gift?

Gifts are classified as anything that has value such as money, property or possessions. Rules also apply if there has been a loss in value when something has been transferred. Say a parent sells their house to their child for less than it’s worth for example. In this case, the difference in value counts as the gift.

Are there any exemptions?

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’. You can also carry any unused annual exemption forward to the next year. Please note however that this can only be done for one year.

You don’t normally have to pay inheritance tax on small gifts you pay for out of your normal income. For example, birthday or Christmas presents. There are also exemptions to gifts given to a spouse or civil partner – you can give them as much as you like during your lifetime, as long as they live in the UK permanently.

HMRC also states the following exemptions:

• Wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
• Payments to help with another person’s living costs, such as an elderly relative or a child under 18
• Gifts to charities and political parties
• You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person