Britons could legally reduce Inheritance Tax through gifts - but there's a 'catch'

Inheritance Tax is a tax on someone’s estate who has passed away, which includes their property, money or possessions. Taxpayers are able to give away up to £3,000 every tax year to their family and loved ones without them being added to the value of their estate.

On The UK Personal Finance Show, Phil Anderson discussed the ‘seven-year rule’ and how it could lead to people paying IHT on gifts they give to loved ones which aren’t covered by the £3,000 gifts allowance.

He said: “To reduce the amount of IHT payable, many families will consider giving their assets away as gifts.

“This is called a potentially exempt transfer, but the catch with this is for the gifts not to be counted as part of your estate, you must outlive the gift by seven years.

“If you die within seven years and the gifts are worth more than the nil rate band, the taper relief applies so that let’s say you die six years in after gifting something away, the tax on that will be less than if you died a year after.

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“If you are gifting things away, if you live for seven years fine, no IHT to pay, but if you die before that time, then there will be some type of tax bill.”

If people die within seven years of giving a gift and there’s IHT to pay, the amount of tax due depends on when they gave it.

Gifts given in the three years before your death are taxed at 40 percent.

Gifts given three to seven years before your death are taxed on a sliding scale known as ‘taper relief’.

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This is how much tax one can expect to pay if death occurs within the seven years:

• Three to four years: 32 percent

• Four to five: 24 percent

• Five to six years: 16 percent

• Six to seven years: Eight percent

• Seven plus years: Zero percent

Under the current tax rules, estates valued at a minimum of £325,000 have to pay up to 40 percent in IHT.

This includes all the assets a person leaves behind after they die, including property and savings after debts and funeral costs have been deducted.

However, if the person gifts some of their estate early, the overall asset value in the estate is reduced.


This can either take it under the £325,000 threshold or, at least, reduce the amount of Inheritance Tax that needs to be paid.

No Inheritance Tax is paid on gifts between spouses and civil partners, provided they live in the UK.

Furthermore, taxpayers can also give away wedding or civil ceremony gifts of up to £1,000 as part of the exemption.

Everyday gifts, such as birthday or Christmas presents, are also eligible to be part of the exemption.

However, taxpayers must be able to maintain a certain standard of living after making the gift.

Mr Anderson added: “Any gifts you do make must be out right gifts, you can no longer benefit from them.

“An example of that would be if you were supposed to gift your house but continued to stay in the house, you would have to pay a commercial rent.

“If you didn’t do that, then HMRC would consider it to be what’s called a ‘gift with reservation’ and this would then be included as part of your estate if that were to happen.”

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