HMRC ‘considering’ rule change for households gifting family money | Personal Finance | Finance

A warning has been issued regarding inheritance tax, with Labour Party government Rachel Reeves likely to target a “little-known” exemption that allows UK households to gift unlimited amounts tax-free.

The Chancellor is reportedly considering a seldom-known exemption that permits individuals to pass on unlimited wealth without paying tax. Regular gifts of surplus income can be immediately exempt from IHT.

Gifts between spouses are typically exempt, but there is a limited spousal exemption for gifts to a spouse who has resided in the UK for less than 10 out of the previous 20 tax years.

According to HMRC rules, gifts must form part of normal expenditure and must be made out of income. The donor must also retain enough income to maintain their usual standard of living, as per tax authority guidelines.

To qualify, the gifts must originate from income rather than savings, and they need to be made regularly as part of someone’s normal spending.

James Harrison, chartered financial planner at Path Financial said: “Often individuals don’t accurately track gifts made during their lifetime, leaving their executors with a paperwork headache on their death.

“Gifts do not count for inheritance tax purposes if they are made to a spouse, civil partner or charities. Gifts to anyone else are liable to count”

Sean McCann, chartered financial planner at NFU Mutual, stated: “Currently, if you make regular gifts there’s no restriction on how much you can give away immediately free from IHT, provided it is out of your income and doesn’t impact your normal standard of living.”

He further suggested that this provision “is likely to be in the chancellor’s sights in the forthcoming budget.”

Mr McCann also added: “Gifts made on a regular basis such as annually or more frequently are more likely to satisfy the test.

“The first gift in a series can qualify even if you die shortly after making it, provided there is evidence that further regular gifts were planned.

“For this reason, it’s a good idea to send your loved ones a note with the first gift confirming your intention to gift regularly and keep a copy with your will.”

Gifts are one of the simplest ways to reduce an inheritance tax bill, because if you live for at least seven years they become exempt.

The seven year rule means you can gift £3,000 a year, plus make unlimited small gifts of up to £250, free from inheritance tax.

Wedding gifts are also exempt, although the amount depends on how close you are to the bride or groom.

If you die before the seven years are up, inheritance tax is levied on a sliding scale – starting at the full whack of 40 per cent if it’s within the first three years. See a full rundown of types of gifts and the sliding scale in the tables below.

Mr Harrison of Path Financial said: “In terms of limits, any amount can be directly gifted to start the ‘seven year clock’ before the gift falls outside of the donor’s estate.

“The £3,000 is not per recipient, but is the donor’s total allowance, so it could be split between multiple people, for example £1,500 to two people. Other gift allowances exist – you can give as many gifts as you like to different people of £250 per person each year.”

Diva Shah of Kingsley Napley added: “HMRC defines a gift as anything that has a value including money, property or land, and items, such as jewellery or antiques and shares.

“An individual can give as many gifts of up to £250 per person each tax year, as long as they have not used another allowance on the same person. Birthday or Christmas gifts from regular income are also exempt from inheritance tax.’

She said a gift like a box of chocolates should fall under one of the exemptions above, but any larger gifts of more than £250 would need to be reported to HMRC unless another exemption applied.