Work out Inheritance Tax due on gifts
Find out which gifts count towards the value of the estate, how to value them and work out how much Inheritance Tax may be due.
Some gifts are exempt from Inheritance Tax especially those made more than 7 years before the person died. However, not all gifts are exempt.
Most gifts a person makes during their lifetime — except gifts covered by an exemption — are called potentially exempt transfers. This is because a gift is exempt from Inheritance Tax if the person survives for 7 years after giving it.
A gift can be money, property or possessions – anything that has value. A gift must reduce the value of the estate and you must include any loss incurred as part of the gift. For example, if a person sells their house to a child for less than it’s worth, the difference in value counts as a gift.
An outright gift is where value is transferred to another individual without conditions. Some exceptions to this are:
- trusts
- gifts with reservation
- pre-owned assets
List all gifts
Work out which gifts to include by following these steps:
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List in date order all of the gifts the person who died made in the last 7 years that are not exempt, starting with the oldest first.
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Keep a running total of their values.
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Check your list to see where the running total goes over the £325,000 threshold. You’ll pay tax on:
- the part of any gift that took the running total over the threshold
- any gifts made after the threshold
Example
Masood died on 1 June 2021 when the Inheritance Tax threshold was £325,000. In the 7 years before he died, he gave the following gifts (after deducting all those that were exempt).
| Date | Value of gift | Running total |
|---|---|---|
| 23 Aug 2014 | £150,000 | £150,000 |
| 12 Dec 2014 | £100,000 | £250,000 |
| 21 Jul 2015 | £50,000 | £300,000 |
| 15 Mar 2017 | £30,000 | £330,000 |
| 03 Jun 2019 | £17,000 | £347,000 |
| 06 Jan 2021 | £10,000 | £357,000 |
When the March 2017 gift is added, the running total goes over the threshold. So Inheritance Tax is due on that gift and all of the later gifts.
However, on the gift made in March 2017, Inheritance Tax is only due on the part of the £30,000 gift that brought the total above the threshold. So for that gift, tax is payable on £5,000 (£330,000 running total - £325,000 threshold = £5,000 excess over the threshold).
When the total gifts are over the Inheritance Tax threshold
Gifts always use up the Inheritance Tax threshold first before any other assets or property that the person who died left.
You must value gifts based on how much they were worth at the time the person gave them.
If the total value of gifts that are not exempt is more than the Inheritance Tax threshold (£325,00 in 2021-2026) tax will be due on all of the gifts that brought the total over the threshold.
Identify gifts that are exempt
These gifts are exempt from Inheritance Tax:
- assets passed to a spouse or civil partner
- gifts to qualifying charities, housing associations, and other exempt organisations
- potentially exempt transfers (gifts made 7 years before the person died)
- gifts of £3,000 or less in any tax year
- small gifts of £250 or less
- wedding and civil partnership gifts
- regular gifts or payments that are part of your normal expenditure and made out of income
Find out how these exemptions work.
Gifts to charities
Gifts to charities are exempt as long as they are made outright to a charity that:
- qualifies as a charity under English and Welsh law — check with them or search the charity register in England and Wales, Scotland or Northern Ireland.
- is established in the EU or other specified country
- is regulated in the country where it was established — if that’s a requirement in that country
- is managed by fit and proper persons
If a person leaves 10% or more of their net estate to a charity, the rate of Inheritance Tax payable on their estate is reduced to 36%. Find out more about leaving gifts to charity in a will.
Gifts to national bodies and other exempt organisations
Gifts for national purposes made to heritage bodies like The National Trust or The National Gallery are exempt.
Find out more in the Gifts for national purposes Inheritance Tax manual
Outright gifts to UK political parties are exempt, provided that, at the last general election before the date of the gift, the party had:
- at least 2 members elected to the House of Commons
- one elected member and received at least 150,000 votes
Work out the value of gifts that are not exempt
In most cases, you need to include the value of the gift at the time it was made. There are some exceptions to this when, for example, a gift is:
- not an outright gift
- not wholly exempt
- eligible for relief
Gifts with reservation and pre-owned assetst are not exempt from Inheritance Tax because they are not outright gifts.
Gifts with reservation
If the person who died gave a gift and used it in the 7 years before they died, it is seen as a ‘gift with reservation of benefit’. It is not an outright gift and is not exempt.
As an example, someone could transfer ownership of their house to a relative and continue to live in it without paying rent at the going rate.
If they continued to use the gift in the 7 years before they died, it counts as part of their estate. It does not matter when they gave it. It is taxed at the market value at the time of their death as if they still owned it.
If they paid rent at the market rate when they gave away their property, they would not have retained a benefit.
If a person gave away their house but had to live there later due to an unforseen change in circumstances owing to old age or infirmity, the gift with reservation rules would not apply. Find out more about exceptions for infirm relatives in the Gifts with reservation: Inheritance Tax Manual.
Tax on the gift with reservation is usually paid by the recipient of the gift. If tax is outstanding 12 months after the person died, their personal representative may have to pay it.
If the person who died made a gift with reservation of benefit, you’ll need to complete form IHT400 along with IHT403 Gifts and other transfers of value Schedule
Find all forms for Inheritance Tax
How to work out tax when the reservation ends
There may be times when a gift is originally given with reservation of benefit and the reservation ends at a later date. This can happen when the parent stops living at the property they have given away and moves into a care home.
Example
In 2011 David put his house into his son and daughter’s names.
He continued to live in the house until 2013.
In 2013 he moved out of the house into a nursing home. On this date the gift of the house became a potentially exempt transfer.
David died in 2021.
As he survived for more than 7 years, the house did not form part of his estate for Inheritance Tax purposes.
The reservation could stop because the donor starts paying a market rent, as in this example.
Example
On 1 July 2014 John gave his house worth £450,000 to his son. He carried on living in it without paying rent. It was a gift with reservation of benefit.
In July 2016 John started to pay rent at the market rate to his son. From this date the reservation ceased, and it became an outright gift.
On 27 February 2021 John died.
The 7 year rule starts from 1 July 2016 when it became an outright gift. It was therefore made 5 years and 5 months before John died. As he did not survive 7 years after making the gift, it is not exempt from Inheritance Tax. Because it started out as a gift with reservation, John’s estate cannot deduct any annual exemptions from the value of the gift.
The value of the house on the date the reservation ceased was £475,000. This is the value of the gift for Inheritance Tax.
At £475,000 the gift was £150,000 over the Inheritance Tax threshold. As it was given between 5-6 years before John died, it attracts taper relief. Tax is charged at 16% instead of the full Inheritance Tax rate of 40%.
Find out more in the Gifts with reservation Inheritance Tax manual
Pre-owned assets
An Income Tax charge can apply if a person gives away assets during their lifetime and continues to benefit from them in some way. Instead of paying Income Tax on this benefit a person can elect to pay Inheritance Tax.
They should submit form IHT500, ‘Election for Inheritance Tax to apply to asset previously owned’, by 31 January after the tax year in which they became liable to the pre-owned assets charge. An election cannot be made after the person’s death.
A pre-owned assets charge applies if an individual transferred money to another person to acquire the land or property that they subsequently used or had an interest in. Pre-owned assets transferred can include:
- land and buildings in the UK
- household and personal goods that can be moved (‘chattels’) such as cars, boats and jewellery
- money or other intangible assets such as a lease for a property or stocks and shares
If the individual elects to pay Inheritance Tax, the asset will be treated as part of their estate for Inheritance Tax purposes under the gifts with reservation of benefit rules.
Find out more in the Pre-owned assets Inheritance Tax manual.
Work out the value where fall in value relief applies
This relief only applies to gifts made in the 7 years before death.
If the value of the assets given away has fallen between the date of gift and the date of death, tax may be charged on the lower value at death.
The relief only applies if the value of the gifts is over the £325,000 threshold. The person who is liable for the tax must claim the relief.
Example
In 2009, Wayne makes two lifetime transfers in excess of the annual exemption:
- in January 2009 he gives £100,000 to his daughter
- in December 2009 he transfers a holding of 175,000 shares worth £350,000 to a relevant property trust
Wayne dies on 1 November 2012.
On 1 November 2012 the holding of shares is worth only £262,500 and the trustee claims fall in value relief.
There was an immediate Inheritance Tax charge of £5,000 on the transfer of shares
The additional tax is charged as follows:
Gift to his daughter 3 years and 7 months before he died = £100,000
Shares transfer 2 years and 7 months before he died = £262,500
Value on which tax can be charged = £362,500
Less Inheritance Tax threshold at date of death - £325,000 = £37,500
Tax at 40% on £37,500 = £15,000
Less tax previously paid on the December 1999 transfer - £5,000
Total tax due on the December 1999 transfer on Wayne’s death = £10,000
Example
Joel transfers a house to his son Philip on 1 November 2009. At that date it was valued at £400,000.
Joel dies on 1 March 2012, 2 years and 8 months later. The house at that date is valued at £375,000.
Without the relief Inheritance Tax is calculated on the value at transfer of £400,000 minus £325,000 (the Inheritance Tax threshold at the date of death) = £75,000
Taper relief does not apply to gifts made less than 3 years before death. Inheritance Tax is charged at the full rate of 40%.
40% of £75,000 = £30,000. This is the tax due.
If Philip makes a claim for fall in value relief the date of death value of £375,000 will be used to calculate the tax instead. The Inheritance Tax payable by Philip is reduced to £20,000.
Find out more in the Lifetime transfers fall in value relief Inheritance Tax manual.
Work out the value if part of an item is given away or a set is split
Inheritance Tax applies to the loss of value from a person’s estate. This loss can be greater than the value of the gift that caused it. Find out more in the Inheritance Tax manual about calculating the loss to the estate.
A loss can happen if the person who has died:
- had assets worth more combined than they were split
- gave part of them as a gift before they died
The value you should use is the total value of the combined assets minus the value of the asset retained.
Example
Sue has a set of two paintings that together are valued at £100,000.
She gives one to her daughter 2 years before she dies. Valued separately, each is worth only £30,000.
By giving one painting to her daughter, Sue’s estate has suffered a loss greater than the value £30,000.
To calculate the loss, from the value of the set (£100,000) subtract the value of one painting on its own
- use the value of the loss (£70,000)
- do not use half the original value of the two paintings (£50,000)
Example
Storey’s Publishing Ltd is a private company that’s issued 10,000 shares.
Garry holds 6,000 shares. This gives him a controlling shareholding of 60% which makes the shares worth £100 each (£600,000).
Shortly before he dies, Garry gives Michelle 2,000 shares. Because Michelle’s shares represent less than 50% of the company, they’re only worth £75 each (£150,000)
Garry’s remaining 4,000 shares are valued at just £300,000 (4,000 × £75).
Before making the gift Garry’s estate included shares worth £600,000. So the gift represents a loss to his estate of £300,000. Therefore, the value of his gift for Inheritance Tax purposes is not £150,000 (2000 shares at £75 per share) but £300,000 (£600,000 minus £300,000).
If tax is due on gifts
Inheritance Tax is only due if the person who died gave away more than £325,000 in gifts in the 7 years before they died. In this situation, the person who gets a gift in these last 7 years will have to pay the Tax.
Gifts use up the £325,000 tax free allowance first. Any unused threshold left after this can be used by the estate of the person who died.
Example
David makes a gift of £350,000 on 10 May 2020 and dies on 27 March 2021. David’s estate on death is £500,000. Inheritance Tax due on the gift is calculated in this way:
Gift £350,000 Minus the Inheritance Tax threshold on 27 March 2021 £325,000 Amount on which tax can be charged £25,000 Tax on the gift at 40% = £25,000 X 40% Tax due on the gift (must be paid by the recipient £10,000
The Inheritance Tax on the estate, that will be paid by the personal representatives is £500,000 X 40% = £200,000
Find out if tax needs to be paid on:
Find out if you can claim taper relief
Taper relief works with the 7 year rule and can reduce the amount of Inheritance Tax you pay on gifts. Find out more about taper relief and how Inheritance Tax on a gift is paid.
If the death occurs on the anniversary of the date the gift was made, it would be treated as being made in the next year.
Example
The tax charge will be set at 24% — the tapered rate for a gift made 4-5 years before the person died — if they:
- gave a gift on 6 July 2013
- died on 6 July 2017
Other reliefs that may apply
Relief if the person who died lived abroad or owned property abroad
If an individual was domiciled abroad or owned a foreign property when they died, they may be liable to tax in two countries. Double taxation agreements help prevent an individual being taxed in two countries.
Domicile affects which country a person pays tax in. It’s only possible to have one domicile at any time. A domicile of choice is when a person moves from one country to another with the intention to settle and make it a permanent home.
Find out about Inheritance Tax deemed domicile rules
Business, Woodland, Heritage and Farm Relief
Some relief from Inheritance Tax may be available if the person who died owned:
- a business
- a farm woodland or
- National Heritage property
Telling HMRC about the value of gifts and paying tax
When you have a final value for gifts, you’ll need to estimate the estate’s value to understand how much tax may be due.
You’ll need tell HMRC about the value of the estate if there’s tax to pay.
You must pay an Inheritance Tax bill by the end of the sixth month after the person died.