New Year, new gifting?

Prior to the Autumn 2025 budget announcement, there were many rumours circulating that the Government may change the rules for lifetime gifts and inheritance tax, especially the “7 year rule”, gifts out of income and a possible cap on lifetime gifts. In the end, they were not addressed at all. Time, perhaps, for those in a position to make such gifts, to consider taking advice about doing so, just in case the Government decides to limit these exemptions in the future.

For many of us, Inheritance tax is often the principal tax viewed as one we wish to avoid. The high rate of the tax (40% on the value of all assets over £325,000) and fear of leaving our loved ones with a significant financial liability after our death, makes many of us look for ways to reduce the liability to inheritance tax and pass on wealth to others before we die.
It is possible to do this by various means, but donors should be aware that making such gifts do not necessarily mean that inheritance tax can be avoided.

Certain lifetime gifts, such as gifts to spouses, charities and political parties, are automatically exempt from inheritance tax. Each person has an annual exemption of £3,000 and any number of small gifts of £250 to different individuals are also exempt. Certain gifts made on the occasion of a marriage or registration of a civil partnership are also exempt, with the exempt amount depending on who is making the gift, for example a gift of £5,000 from a parent to a couple is exempt.

Other gifts can be exempt from inheritance tax, but only if the donor lives for seven years from the date of the gift. These are known as ‘potentially exempt transfers’ (or PETS). There is a reduction on the rate of tax due on these gifts between 3–7 years prior to death if the total of all life time gifts exceeds £325,000.

Many do take advantage of this potential exemption, but great care should be taken if a donor wishes to give a home to children or other individuals whilst they are still alive. Where the donor still retains a benefit from a gift, which would be the case if the donor continues to live in a property rent-free, HMRC does not view this as a perfect gift and the asset will be deemed as remaining in the donor’s estate for inheritance tax purposes.

One exemption which is often overlooked is where gifts of any value are made out of income (called “Normal Expenditure out of Income” (NEI)). For this exemption to be claimed, donors should make sure that their executors will be able to prove to HMRC that they are able to make these gifts from their income without any change to their standard of living ie. surplus income. Advice should be taken if donors wish to rely on this exemption, to make sure that their executors are not left with an unexpected liability or spend endless time trying to put together records retrospectively.
Taking advice early, well before you are running the gauntlet of surviving for seven years, can bring peace of mind and allow you to witness how those you love enjoy the benefits of your generosity.