The inheritance tax-free art of holiday gifting

By Emily Wentworth, Tax, Trusts and Estates solicitor at Irwin Mitchell

As the festive season rolls around and the Christmas songs hit the shops and the radio, it can be an occasion to consider making gifts.

There are a number of ways gifts can be made free of inheritance tax to loved ones, friends and family which apply all year round, but may be of particular importance for those considering gifts in the holiday season.

• Small gifts exemption – this applies to gifts made to individuals of £250 and below, making them entirely free from inheritance tax (IHT). There's no limit on this exemption and can apply to as many gifts to different individuals that you would like to make. This exemption isn't cumulative, can only apply to one gift made to an individual in any one tax year, and cannot be used to make a significant gift to an individual in smaller chunks.
• Annual exemption – this applies in addition to the small gifts exemption and is set at a current value of £3,000 per tax year. However this must be given to different people who receive the small gift payments. The application of this exemption applies in chronological order to the gifts you have made first until the exemption is reached. It's possible to carry over an exemption to the following tax year for one year only, this therefore means a maximum of £6,000 in every other tax year.
• Charitable giving – charitable giving is always free of IHT and is a great way to support local and national causes who are in need of funding, particularly around the holidays.
• Nil rate band – every individual has a nil rate band allowance of £325,000 (2021/2022) which is taxed at 0% on their death. Gifts made during the lifetime of an individual are deducted from the available nil rate band first and the band is then set against the assets within your estate for IHT purposes.

Any gifts made in excess or in addition to the exemptions set out above will be classed as potentially exempt transfers (PETs). Usually, where a PET is made, after seven years the value of the PET will fall outside of your estate for IHT purposes completely, essentially resetting your available nil rate band.

However for the gift to be a PET, and fall outside of your estate after seven years, you must not retain the asset or any benefit in it.  For example if you gift a painting worth £10,000 to your daughter but keep this on your wall in your home, then this is not a PET but a gift with reservation of benefit. This means on your death, even if you die after seven years, the value of the painting, the £10,000, will still be part of your estate for IHT.

It is also important to remember if you make gifts of assets and not cash, and the asset has increased in value since you purchased it, there may be capital gains tax to pay on the gift. 

You should therefore always take tax advice before gifting assets.