In the UK, Inheritance Tax (IHT) may be payable on gifts made during a person’s lifetime if they pass away within seven years of making the gift. The rules governing IHT on gifts include various exemptions and reliefs designed to reduce the potential tax liability. Here’s an overview of the key rules and exemptions:

Key Rules for Inheritance Tax on Gifts

1. Seven-Year Rule:
   • If the gift giver (donor) survives for seven years after making a gift, it is generally exempt from IHT.
   • If the donor dies within seven years, the gift may be subject to IHT, but the tax rate reduces on a sliding scale (taper relief) after the first three years.
2. Annual Exemption:
   • Each tax year, an individual can give away up to £3,000 worth of gifts without them being added to the value of their estate.
   • If the annual exemption wasn’t used in the previous tax year, it can be carried forward to the current year, allowing up to £6,000 in exempt gifts.
3. Small Gifts Exemption:
   • Gifts of up to £250 per person per tax year are exempt, provided the recipient has not received part of the £3,000 annual exemption.
4. Wedding or Civil Partnership Gifts:
   • Gifts to someone getting married or entering a civil partnership are exempt up to:
     • £5,000 from a parent.
     • £2,500 from a grandparent or great-grandparent.
     • £2,500 from the bride or groom to each other.
     • £1,000 from anyone else.
5. Regular Gifts from Income:
   • Gifts that are part of normal expenditure out of income, not capital, can be exempt if they don’t affect the donor’s standard of living. These could include regular payments such as Christmas or birthday presents, or regular premiums on a life insurance policy.

Potentially Exempt Transfers (PETs)

• Gifts not covered by the above exemptions are considered Potentially Exempt Transfers (PETs). If the donor survives seven years after making a PET, it becomes fully exempt from IHT.
• If the donor dies within seven years, the PET becomes chargeable, and the amount of IHT due depends on when the gift was made relative to the donor’s death, subject to taper relief.

Taper Relief

If a donor dies between three and seven years after making a gift, taper relief can reduce the IHT on the gift. The relief applies as follows:

• 3 to 4 years: 20% reduction.
• 4 to 5 years: 40% reduction.
• 5 to 6 years: 60% reduction.
• 6 to 7 years: 80% reduction.
• Over 7 years: 100% reduction (no IHT).

Exemptions for Specific Types of Gifts

1. Gifts to Spouses or Civil Partners:
   • Gifts between spouses or civil partners are generally exempt from IHT, provided both partners have the same domicile status.
2. Charitable Gifts:
   • Gifts to registered charities are exempt from IHT.
3. Gifts for National Purposes:
   • Gifts to certain national institutions such as museums, universities, and the National Trust are exempt.

Important Considerations

• Documentation: It’s essential to keep records of all gifts, including the date, amount, and recipient, to ensure clarity and compliance with IHT rules.
• Professional Advice: Given the complexity of IHT rules and potential tax planning opportunities, it’s advisable to seek advice from a tax professional or financial advisor.

In summary, while gifts can be a useful way to reduce the value of an estate for IHT purposes, it is important to understand and comply with the specific rules and exemptions to avoid unexpected tax liabilities.