‘Can I gift more than £3,000 a year without paying tax?’

Ask an Expert: here are the tricks of the trade to reduce your inheritance tax bill

inheritance tax

Dear Ask an Expert,

Is it possible to gift more than the £3,000 annual allowance and not fall foul of inheritance tax?


– VS, via email

Dear reader,

Most people are aware that you can give away £3,000 each tax year and it will not be included as part of the value of your estate when you die. However, it is possible to gift more than this without adding to your IHT bill.

First, you could give away £6,000 in one tax year by bringing forward your annual allowance, assuming you did not use it the year before. You can only do this for one tax year.

The annual allowance also applies to each spouse, so a couple’s combined allowance is £6,000 for one year.

In addition to the annual allowance, you can make wedding or civil partnership gifts to someone who is getting married in that year. This is up to £5,000 if you are gifting to a child, £2,500 to a grandchild or great-grandchild, £2,500 from one party of the marriage to another and £1,000 to any other person. It is acceptable to combine this with your £3,000 annual allowance. For example, you could gift your child who was getting married £8,000 in that year without incurring an IHT liability.

Another exemption is the small gift allowance, which you can use to give gifts of up to £250 per person each year. You can gift this to as many people as you like, but not to anyone who has already benefited from your £3,000 annual exemption.

However, these are not the only options. One of the most valuable ways to avoid an IHT bill is by giving gifts “out of income”.

As long as the payments are made from your annual income and do not reduce your living standards, then you can make gifts to help the other person with their living costs. There is no limit to the amount, but there needs to be a pattern to the gifting – a one-off payment is unlikely to qualify.

Likewise, if you have to sell assets in order to afford the payments, you could be hit by an IHT bill. Chris Etherington, of accountancy RSM, said: “You need to be able to maintain a normal lifestyle, so it wouldn’t count if proceeds come from a sale.”

You can combine gifts out of income with any other allowance apart from the small gift allowance. This means you could give someone £200 a month to help with their living expenses and also give them £3,000 a year through your annual exemption and the combined £5,400 a year would be free from IHT. Accountants advise keeping detailed records of your income and expend­iture as evidence – and telling your ­family where these are kept.

Gifts made to some family members for their maintenance or education also have no IHT implications. This includes spouses, children under 18 or relatives who are financially dependent on you.

“Potentially exempt transfers” are treated differently. These are gifts of unlimited value that are not treated as free from IHT unless you survive seven years after making the gift. “Gifts out of income are not part of your estate, so you don’t need to survive them – whereas many gifts are ‘potentially exempt transfers’ where you need to survive seven years,” said Mr Etherington.

Finally, remember that all gifts made to charities or political parties (with at least two MPs) are also free from IHT.

Reader Service: Do you pay tax on equity release? Dispel the most common equity release myths, or discover how much you could unlock with the equity release calculator.