Use Your £3,000 Annual Gift Allowance
Each tax year, you can give away up to £3,000 in total without it forming part of your estate for IHT purposes. You can give the full £3,000 to one person, or split it across multiple people. If you didn’t use your allowance last tax year, you can carry it forward once, meaning you could gift up to £6,000 in one year without any IHT implications. This is one of the simplest and most effective ways to pass on money tax-free and it’s often underused – so check to see if you can make the most of it!
Make use of the £250 small-gift exemption
You can also give up to £250 per person per tax year to as many people as you like, completely tax-free. This exemption does not count towards your £3,000 annual allowance but it cannot be combined with another allowance for the same person. For example, you could give £250 each to several grandchildren at Christmas, while still using your £3,000 allowance elsewhere.
Don’t forget the wedding gift allowances
The festive season is a popular time for couples to get engaged, and, if someone close to you is getting married or entering a civil partnership, you can make additional tax-free gifts as follows:
- £5,000 to a child
- £2,500 to a grandchild
- £1,000 to anyone else
These allowances are separate from your annual exemption, although certain rules apply and the gift must be made on or shortly before the wedding.
Could you make regular gifts from surplus income instead?
If you’d rather not give a lump sum all at once, then you might want to spread your cash gift over the year. If you choose this option, then one of the most generous – and probably least understood exemptions – is for gifts made from surplus income.
If you make gifts regularly, can pay them from income rather than savings and can still maintain your usual standard of living, then those gifts can be immediately exempt from IHT, no matter the amount.
This is often used to help with adult children’s rent or bills, grandchildren’s school fees or other ongoing support for relatives – which has become increasingly popular during the cost of living crisis.
Good record-keeping is essential here, as your executors will need to provide supporting evidence to prove that the gifts given are out of surplus income and do not impact your standard of living.
The Seven-Year rule and the truth about taper relief
If you give more than your available allowances, the gift usually becomes a Potentially Exempt Transfer (PET) – also known as the “seven-year rule”.
How it works is, if you live for seven years after making the gift, it falls completely outside your estate — no IHT is due. However, if you die within seven years, the gift may be added back into your estate and could be taxed.
Taper Relief is often misunderstood because it does not reduce the value of the gift and it does not automatically apply just because someone dies within seven years.
You only benefit from taper relief once your total gifts exceed the IHT nil-rate band, which is currently £325,000. If your estate and lifetime gifts stay below £325,000, no IHT is due anyway – so taper relief is irrelevant.
Taper relief only reduces the tax payable on the portion above £325,000, and only if death occurs between 3 and 7 years after making the gift at the following rates:
- 3–4 years: 20% reduction
- 4–5 years: 40% reduction
- 5–6 years: 60% reduction
- 6–7 years: 80% reduction
- 7+ years: 100% relief (no IHT)
Earlier gifts are also counted first when calculating how much of the nil-rate band has been used.
It’s always recommended to seek legal advice and if you are planning to give the gift of cash this Christmas, and you’re concerned about tax implications, contact Downs with any questions you may have.
Contact Katie Carter
