‘Gifting’ is a term used to describe the giving of cash, property, or assets to another person while you’re alive. If you live for seven years after the gift was made, it will be exempt from inheritance tax (IHT), unless that gift is part of a trust.

But if you die within seven years of making a gift, the recipient could be subject to an IHT bill. The precise amount they would have to pay will depend on the size of your taxable estate when you die, the value of the gift, and how long ago you gave it (a sliding tax scale will be applied between years 3-7).

If you were to pass within three years of making the gift, the recipient may be required to pay the full 40% tax on the value of your gift. That could be quite a large sum that your child or another relative may unexpectedly need to find at a time of grief and emotional stress.

There are some tax relief exemptions to this, though.

Everyone has an annual exemption, which allows you to gift a total of £3,000 free of inheritance tax. This can be gifted to one person, or split between several people.

If you don’t use your £3,000 annual exemption, you can carry this forward one year, meaning you could gift a total of £6,000 without worrying about IHT. If there are two parents, you could use both of your tax exemption allowances to gift a potential total of £12,000 between you.

The small gift exemption allows you to gift up to £250 per person, per tax year, to an unlimited number of people. But, importantly, you can’t use this tax exemption when making a gift to a person you’ve used another exemption on. So, if you’ve already used your £3,000 gifting tax exemption towards your child’s wedding, you can’t use this exemption on them too.

This exemption is a little more complex and only applies to certain gifts under specific circumstances. You should seek advice to understand whether you meet the criteria. As the donor of the gift, you must satisfy three conditions in order for your gift to be immediately exempt from IHT:

1. The gift must be made as part of the normal expenditure of the donor. Examples could be a regular gift, including Christmas or birthday gifts, annual family holiday or education costs
2. The donor must retain sufficient income to maintain their standard of living
3. The gift must be made from income, not existing assets or investments such as pension drawdown

This exemption is the one that can make all the difference – especially for parents, grandparents or great-grandparents contributing towards a wedding or civil partnership. It qualifies you for an additional tax-free exemption, depending on your relationship with the recipient, allowing you to gift up to:

• £5,000 to your own child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person

You must make the gift shortly before the marriage or civil partnership. It must be made in contemplation of the wedding, and the gift is conditional on the marriage or civil partnership going ahead.

You can combine this gift with the annual gift allowance of £3,000, but not with the small gift exemption. So, if each parent uses their full gift allowances, plus they carry forward an unused annual exemption from the previous year, they could gift their child £11,000 each, or £22,000 in total from both parents – plus any gifts that are classed as normal expenditure out of income.

Making a gift or contributing to the wedding costs for your children or grandchildren, can be hugely fulfilling. But whilst weddings and civil partnerships get more expensive every year, inheritance tax exemptions around gifting haven’t changed since 1984! This means you must be mindful of the potential tax implications when making a significant gift.

Amber River financial planners can advise on all areas of estate planning to ensure you are doing everything possible to reduce your family’s inheritance tax liability.

If want to speak to one of our team about gifting or another financial planning issue, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.