There is a saying that it’s better to give than to receive. However, would you like to enjoy the pleasure of seeing your loved ones enjoy your gift and reduce inheritance tax (IHT) at the same time? If so, you’ll want to understand the rules to avoid the pitfalls. This article aims to explain these.

It is surprising that one of the most valuable exemptions from Inheritance Tax (IHT) is also one of the most underused. The normal expenditure out of income exemption applies to certain gifts. The most usual example is cash but in some circumstances the exemption can apply to chattels bought from income for the specific purpose of making the gift. The exemption is limited in amount only to the extent of your surplus income. When used alongside the IHT £3,000 annual exemption, it can be very useful in moving assets out of your estate.
Most gifts stay in an estate for seven years after the date of gift. However, provided that you satisfy three conditions, gifts out of income can be treated as immediately exempt from IHT.

Qualifying conditions

The qualifying conditions are, that the gift must be made as part of the normal expenditure, you must retain sufficient income to maintain your standard of living and they must be made out of income.

  • You should understand what counts as a gift for IHT purposes. Put simply, it can be anything that is part of your estate. Property, cars, cash, investments, jewellery – even collections of stamps, wine, coins or sports memorabilia can be liable to inheritance tax. Normally you can’t add conditions to your gifts. For example, if the gift is a home, you can’t continue to live in it rent-free. Ideally, you should commence gifting as early as possible, to start your IHT clock. Normally, seven years must pass before your gift is 100% IHT-free. If you die before this time lapses, the person you’ve given the gift to may owe IHT.
  • Making gifts earlier also increases your chance of getting to experience the pleasure that comes from seeing those you love enjoy what you’ve given – and to thank you for it.
  • We all have an annual exemption that allows gifts up to £3,000 free of IHT each year. If this full amount isn’t taken one year, it carries over into the next year, but no further. This means that if you don’t give the full amount one year, you can give £6,000 the following year. We all can also give as many gifts as we like up to £250 per person. These gifts are currently IHT exempt – there’s no seven year clock ticking. Please note that it isn`t possible to combine this small gift allowance with any other gift allowance for the same person, meaning that you can’t give someone a £3,000 gift and then another £250 small gift. 
  • Special rules apply for weddings. Weddings are gift-giving occasions. The amount that you can give IHT free depends on your relationship to the couple, the timing and amount of your gift. Generally, the more closely you’re related to the couple, the more you can give. So if one of your children marries, you can give up to £5,000. If a grandchild or great-grandchild marries, this reduces to £2,500 or less. If you’re giving to a relative or friend this drops to £1,000. 
  • It’s very important that you document the details of any gifts that you make. That is, to record whom each gift was given to, the gift they were given, the date the gift was given, the value of the gift and if possible, to keep evidence of the gift, for example, you can use a bank statement to evidence a gift of money. This will make it easier to establish if there is any IHT due on your gifts.

If you think you might be in this position or want to discuss the issues raised in this article, please contact your normal Dentons Wealth Independent Financial Adviser. 


Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.