Making use of your inheritance tax allowances

12 March 2024
by
Zubaria Zafar

Making use of your inheritance tax allowances

12 March 2024
by
Zubaria Zafar

Making use of your inheritance tax allowances

It is often said that inheritance tax (IHT) is a voluntary tax, and one that can be avoided if you give away sufficient assets at least seven years before you die so the value of your estate is sheltered by your available nil rate bands. This is not always practical – people do not generally know when they are going to die and they need somewhere to live and the ability to fund their life in the meantime. However, there are various IHT allowances and exemptions that allow lifetime gifts to be made free of inheritance tax, even if you die within seven years of making the gift.

Regular payments from income

Gifts that you make from your income do not count as part of your estate for IHT purposes as long as you can afford to make the payments after meeting your living costs and the payments are made out of your regular income. For example, if you have surplus income each month, you could help a child with their rent, pay school fees for a grandchild or provide financial assistance for a relative.

You can give away as much of your surplus regular income as you like, and also take advantage of various allowances and exemptions to make gifts from your capital free of IHT.

You may also like to read: Making Tax Digital for landlords

IHT annual exemption

The annual exemption allows you to make gifts of up to £3,000 a year without them being included in your estate for IHT purposes. Unlike many other annual exemptions and allowances, if the IHT annual exemption is not used in full for one tax year, the unused amount can be carried forward to the next tax year. However, the exemption for the current year must be used before any unused amount from the previous year.

If you did not use your 2022/23 annual exempt amount, you can make gifts of up to £6,000 before the end of the 2023/24 tax year without them being added to the value of your estate.

Small gift allowance

The small gift allowance means that you can make gifts of £250 a year to as many people as you like without the gifts counting as part of your estate. However, there is a catch – gifts to the same person cannot benefit from both the small gift allowance and another allowance or exemption.

Wedding and civil partnership gifts

The value of this exemption depends on the relationship between you and the recipient of the gift. For wedding and civil partnership gifts to a child, the exemption is £5,000, for a grandchild, it is £2,500 and for a wedding or civil partnership gift to any other person, the exemption is £1,000.

The same person can benefit from a wedding/civil partnership gift and other exemptions and allowances with the exception of the small gift allowance. For example, if you have not used your 2023/24 or 2022/23 annual exemption and your child marries before 6 April 2024, you could make a wedding gift of £11,000 free of IHT.

Gifts to spouses and civil partners

Gifts to spouses and civil partners can be made free of IHT without limit.

Other gifts

Exemptions also apply for certain gifts to charities or registered clubs, political parties, housing associations and to gifts for national purposes or public benefit.

Partner note: IHTA 1984, Pt. 2 Ch. 1.

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