Inheritance tax rule could give money to family instead of HMRC | Personal Finance | Finance

Inheritance tax charges a steep 40% on your eligible estate, potentially leaving grieving family members with a hefty bill to pay during their darkest times. From April 2027, the average inheritance tax bill is estimated to increase by £34,000 – but following some simple rules while you’re still alive could potentially mitigate the impact.

When done correctly, gifting can mean the value of the gift is excluded from inheritance tax calculations, which can reduce the value of your estate and consequently decrease the amount of inheritance tax payable. Nevertheless, gifting items improperly can result in them still being counted for inheritance tax purposes despite your intentions.

Gifts may not be included for inheritance tax depending on:

• Who you give the gift to and your relationship with them
• The value of the gift
• When the gift was give

What constitutes a gift

For inheritance tax purposes, a gift can encompass various items including money, household and personal goods such as furniture or jewellery, houses, land, buildings, stocks and shares on the London Stock Exchange and unlisted shares held for less than two years before your death.

If you sell something for below its actual worth, this shortfall can also be considered a gift. For instance, if you sell your home to your child for less than its market value, the difference between what they paid and the value will count as a gift. Birthday and Christmas presents given from your regular income are typically exempt from inheritance tax.

Anything left in your will does not qualify as a gift — it forms part of your estate, which is subject to inheritance tax.

Should you give something as a gift but continue to derive benefit from it, it will be taken into account for inheritance tax purposes. This covers circumstances where you sign your home over to a relative but remain living there, or gift a caravan but use it rent-free for holidays.

Who you gift to

There is no inheritance tax liability on gifts exchanged between spouses or civil partners, with no ceiling on the amount you can give, provided they are permanently resident in the UK and you are legally wed or in a civil partnership.

Gifts made to charities or political parties are similarly excluded from inheritance tax calculations.

Wedding gifts are also free from taxation, though limits apply depending on your relationship with the couple. Parents may gift up to £5,000, while grandparents or great-grandparents are restricted to half that amount before tax becomes applicable.

When the gift was given

Gifts made seven or more years prior to your death will not be considered for inheritance tax. Should you pass away within seven years of making a gift, it will be taxed on a sliding scale referred to as taper relief, ranging from 8% to 32%.

However, gifts made within three years of death are taxed at 40%. This is commonly known as the seven year rule. The Government recommends maintaining records of gifts you provide, including details of the recipient, the value and the date it was given, to simplify determining whether inheritance tax is due on it.