If you’re planning to give any financial gifts this Christmas, make sure you swot up on inheritance tax (IHT) rules first so you can be certain you won’t end up landing loved ones with a tax bill.


Gary Smith, chartered financial planner at leading advice firm Tilney, said: “Each year, many people give monetary gifts to organisations, spouses and loved ones. While this is obviously a generous thing to do, you must be aware of potential tax implications before you do. Many of these gifts will fall within the HMRC’s allowable limits, but there may be some that could inadvertently cause tax issues for both the giver and the recipient."

Here, we look at the rules on financial gifts so that you don’t fall foul of the taxman.

How IHT works

IHT is payable at a rate of 40% on the value of your estate which is above £325,000 when you die, or £650,000 if you’re married. So, for example, if you’re single and your estate is worth £425,000, your loved ones could face an IHT bill of £40,000, which is 40% of the £100,000 which is over the £325,000 IHT threshold.

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There’s also an additional £150,000 family home allowance, which makes it easier to pass on the family home to children without being hit with an IHT bill. This is due to rise to £175,000 in April 2020.

What are the rules on gifts?

You can make financial gifts up to the value of £3,000 in any one tax year, which is the annual gifting exemption. You can also carry forward any unused £3,000 allowance from the previous tax-year, so you may be able to give up to £6,000 if you didn’t make any financial gifts last year.

You can also give small gifts of up to £250 to as many people as you want in the tax year free from IHT, but you can’t give more than this amount to any one person.

There’s an additional allowance if your child or grandchild is getting married. No IHT is payable on wedding or civil partnership gifts worth up to £5,000 given to your child, or £2,500 if you’re making a gift to your grandchild or great-grandchild.

If you’re giving a financial gift to your spouse or civil partner, this will always be free of IHT. Financial gifts to anyone else will only be tax-free if passed on seven or more years before you die.

The Office of Tax Simplification has recommended that this is reduced to five years in future, as it has found that relatively little IHT is paid on gifts made more than five years before death.

Sam Jermy, senior business development manager at TIME Investments said: “One reason for this could be the difficulty in locating financial records beyond five years. The proposed reduction of the gifting time limit from seven to five years makes sense considering their findings and could encourage greater transfer of wealth between generations at an earlier stage.”