HMRC has issued a warning to UK households: improper gifting this Christmas could lead to hefty inheritance tax (IHT) charges. Personal finance experts are urging families to be mindful of the £3,000 annual gift allowance, which protects gifts from IHT when certain conditions are met.
Under current rules, gifts made during a person’s lifetime can be exempt from IHT if the donor lives for more than seven years after giving the gift. These are known as Potentially Exempt Transfers (PETs). However, if the donor passes away within seven years, the gift becomes a Chargeable Transfer and may be subject to IHT.
Each individual has an annual exemption allowing gifts or cash up to £3,000 in a tax year without increasing their estate’s taxable value. If the full £3,000 isn’t used, the leftover amount can be carried forward only to the immediate next tax year.
Certain gifts, such as wedding gifts or those to charities, do not count towards this exemption and are generally exempt from IHT altogether. Gifts exceeding the £3,000 limit or not qualifying for exemptions could attract inheritance tax.
The timing of the donor’s death relative to the gift also affects the tax rate. If the donor dies within three years of gifting, the tax rate on the gift could be as high as 40%. This rate tapers down over the seven-year period:
- Less than 3 years: 40% IHT
- 3 to 4 years: 32% IHT
- 4 to 5 years: 24% IHT
- 5 to 6 years: 16% IHT
- 6 to 7 years: 8% IHT
- More than 7 years: 0% IHT
This scaling incentivizes careful planning to minimize tax liabilities when gifting during the holiday season or any other time.
With Christmas approaching, it is essential for UK families to understand these rules to avoid unexpected tax bills and ensure gifts truly benefit loved ones.