There is an annual exemption of £3,000 for gifts which those who wish to reduce the size of their estate can take advantage. 

Any unused exemption in one year can be carried over to subsequent tax years, up to a maximum exemption of £6,000 in any one year. Certain smaller gifts for specific reasons are also exempt of Inheritance Tax and do not count towards this £3,000 total. 

These include gifts for weddings of:

• £5,000 for a child

• £2,500 for a grandchild

• £1,000 to anyone else

Gifts of up to £250 can also be given to individuals as long as the same person does not receive more than £250 in one tax year 
and that person has not also received either a wedding gift or money that is counting towards the £3,000 annual exemption. 

There is no Inheritance Tax payable on gifts from regular income, after tax, as long as the giver is left with enough income to manage their normal lifestyle. 

Gifts that can be given from regular income include:

• Christmas, birthday and wedding, civil partnership or anniversary presents

• Money paid in premiums on a life assurance policy

• Regular payments made into a savings account

To confirm that the money being given from income is not having a detrimental effect on lifestyle, it is advisable to keep a gift log. This may be required by the executors of your estate to support any claim that is then made against your estate later. 

This log should therefore be fairly comprehensive. You should list out the net income being received, by source, and against that, list details of your expenses before the gifts are made. Expenses should include all items, ie: not just large payments such as mortgages or rent but also insurances, household bills, holidays, entertainment, travel, care fees, etc. Using such a form would make it obvious to an observer how much surplus you have left and therefore what you can afford to fund items such as those listed above. 

If you make regular payments

You can make regular payments to help with another person’s living costs. There’s no limit to how much you can give tax free, as long as:

• you can afford the payments after meeting your usual living costs
• you pay from your regular monthly income

These are known as ‘normal expenditure out of income’. They include:

• paying rent for your child
• paying into a savings account for a child under 18
• giving financial support to an elderly relative

If you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, except for the small gift allowance.

For example, you can give your child a regular payment of £60 a month (a total of £720 a year) as well as using your annual exemption of £3,000 in the same tax year.

To confirm that the money being given from income is not having a detrimental effect on lifestyle, it is advisable to keep a gift log. This may be required by the executors of your estate to support any claim that is then made against your estate later. 

This log should therefore be fairly comprehensive. You should list out the net income being received, by source, and against that, list details of your expenses before the gifts are made. Expenses should include all items, ie: not just large payments such as mortgages or rent but also insurances, household bills, holidays, entertainment, travel, care fees, etc. Using such a form would make it obvious to an observer how much surplus you have left and therefore what you can afford to fund items such as those listed above. 

You can make donations to charities during your lifetime without being liable for Inheritance Tax on the gift. 

This exemption also covers donations to museums, universities and community amateur sports clubs. 

In addition, if you leave a donation of at least 10% of your estate value to charity, the Inheritance Tax liability for your beneficiaries on death will be just 36% rather than the usual 40%. 

Finally, there is no Inheritance Tax payable on donations to political parties, as long as the party concerned has either:

• At least 2 members elected to the House of Commons or

• 1 member elected to the House of Commons but also received a total of at least 150,000 votes at the general election 

Lifetime gifts can be a way of giving away assets during your life – if you can live without them

A lifetime gift includes money, property or possessions given away during your lifetime, or which were either sold or transferred for a value less than that asset was actually worth. 

​Hence, assuming gifts do not fall within the exempt gifts listed on this page, a potential Inheritance Tax (IHT) liability would arise in all the following examples:

• You gave one of your children a gift of £25,000 to use as deposit to buy their own house in their own name;

• You offered to pay off a £10,000 loan for a friend or relative without a putting into place a repayment agreement which would recoup your money;

• You sold your house to your children at 50% of its market value.