Certain gifts made by individuals qualify for specific IHT exemptions. We provide a list of the main ones below. Consider using one or more of them to build up funds gradually outside your estate without incurring an IHT liability. The use of trusts in conjunction with exemptions may enable retention of control over the funds. A husband and wife can each take advantage of the exemptions.
The annual exemption amounts to £3,000 per tax year. It may be carried forward one year if unused but not thereafter.
Small gifts to individuals not exceeding £250 in total per tax year per recipient are exempt.
Gifts made out of income that are typical and habitual and do not result in a fall in the standard of living of the donor are covered by the normal expenditure out of income exemption.
Gifts for family maintenance are exempt. This would include gifts for the education of children (but not grandchildren).
Gifts made in consideration of marriage are exempt up to £5,000 if made by a parent, with lower limits for other donors.
Charitable gifts are exempt whether made during lifetime or on death.
One of the most important exemptions is that for gifts between spouses. This applies to both lifetime and death transfers and to transfers into trust as well as outright transfers. It may be desirable to use the spouse exemption to ensure that both spouses can make full use of exemptions and the £255,000 nil rate band. The spouse exemption does not apply where couples live together as partners rather than marry.
Although not strictly an exemption the nil rate band of £255,000 can be used to make ‘tax-free’ gifts. Given the seven year cumulative nature of IHT it is possible for individuals to make gifts equal to the nil rate band once every seven years. For wealthy individuals in a position to make substantial lifetime gifts of capital this can be very significant. For example, an individual in their early fifties who lives to age 80 could make gifts totalling £1million within the protection of the nil rate band over the remainder of their life.