Inheritance Tax and Gifting Exemptions


11th July 2023

The rules on inheritance tax (“IHT”) surrounding gifting can be complex. Many are aware of the basics of gifting exemptions but few understand the logistics of how gifts are reported to HMRC and how we can make this reporting easier for our executors in the future. This blog lightly touches upon the difficulties executors can face when disclosing lifetime gifts to HMRC and how you can make life simpler for your executors (the people who will sort out your estate after your death).

Gifting exemptions

There are well-known exemptions to gifting, namely:

  • Spousal/Civil Partner exemption
  • Small gifts exemption
  • Normal expenditure from income exemption
  • Charity/political party exemption
  • Annual exemption of £3000 per tax year

Importantly, gifts which you make in your lifetime are not subject to IHT if you survive for 7 years after making the gift, subject to you not retaining any interest in the gift. If you die within 7 years of giving a gift, the recipient of the gift may need to pay IHT.

Difficulties for executors

Executors are under a duty to disclose to HMRC any gifts that the deceased person made in the 7 years before their death. A failure to do so can lead to HMRC issuing penalties of up to 100% of the amount of the tax payable on that gift.

The severity of the penalty will be dependent on how serious HMRC deem the breach to be. This comes in 3 categories:

  1. Error arises because of a lack of reasonable care = penalty between 0% and 30% of the extra tax due
  2. The error is deliberate = penalty between 20% and 70% of the extra tax due
  3. The error is deliberate and concealed = penalty between 30% and 100% of the extra tax due.

Therefore, to ensure your executors do not accidentally incur penalties when disclosing the gifts made in your lifetime, keeping a record of the gifts you have made is incredibly helpful.

How to help your executors

One of the main pieces of advice we give to our clients is to begin preparing a record of all gifts they are making, the value of that gift and to whom. One great way to do this is to begin filling in Form IHT403 which can be downloaded from the Government website. Page 3 of Form IHT403 (pictured below) gives a really useful template which contains all of the information HMRC require when assessing lifetime gifts. If you decide to do this, remember to go back 7 years from today’s date and keep your record regularly updated.

Gift made within the 7 years

In this article we have explored some of the key exemptions to IHT through gifting, the penalties executors can incur when disclosing lifetime gifts to HMRC and ways in which an individual can assist their executors in the future. For further information and IHT planning in general it is strongly advised that proper legal and financial advice, specific to your individual circumstances is sought before any decision is made. If you would like to speak with a member of our team, please contact us.

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