Gifts and transfers #
If the deceased had made any gifts (or other transfers of assets) during their lifetime, you will need to take these into account to find out whether the estate qualifies as an excepted estate. You must start with all gifts and transfers that the deceased made, even those made to their spouse or civil partner or to a qualifying charity.
What makes a gift #
Gifts are transfers of money or other assets made by the deceased during their lifetime. Gifts do not include bequests and legacies made in the deceased’s Will. So, if, while they were still alive, the deceased gave their son £8,000 to buy a car, that would be a gift. If the deceased’s Will says “I give £5,000 to my son” that would be a legacy under the Will, not a gift. A gift or transfer will be relevant for Inheritance.
A gift or transfer will be relevant for Inheritance Tax if, having made the gift or transfer, the value of the deceased’s estate has gone down. So this will include straightforward cash gifts or a gift of a particular asset. Other transactions such as the sale of a house for less than its full market value, or a gift of shares that results in the deceased losing control of a company will also be relevant.
If the deceased did make gifts (or other transfers) that exceeded £3,000 in any one tax year, you can take away certain allowable exemptions from the gifts.
Any gifts made 7 years prior to death are normally ignored for Inheritance Tax. You should not ignore gifts or transfers where the deceased kept back some benefit or interest in the assets given away or was entitled to use the assets given away.
Specified transfers #
The gifts and transfers must qualify as ‘specified transfers’. To qualify as ‘specified transfers’ the assets given away can only be:
- Cash.
- Listed stocks and shares.
- Household and personal goods.
- Houses, land and buildings.
and; The total value of the gifts at the time the gifts were made, after taking away any exemptions that are allowable, must be less than or equal to £150,000.
Gifts of houses, land or buildings: Gifts of houses, land or buildings only qualify as ‘specified transfers’ if they were outright gifts from one individual to another.
Gifts exempted from Inheritance Tax #
If the deceased did make gifts (or other transfers) that exceeded £3,000 in any one year, you can take away certain allowable exemptions from the gifts. The only exemptions that you can take away are:
- Small gift exemption.
- Annual exemption.
- Gifts on marriage or civil partnership.
- Exemption for gifts made as normal expenditure out of income – provided the total value of gifts out of income is under £3,000 for each tax year.
Small gift exemption: Gifts to any one person which do not exceed £250 in any one tax year to 5 April are exempt. This exemption covers gifts at birthdays and other festive occasions. You cannot use small gift exemption in conjunction with any other exemption. This exemption can only be used if all the gifts made to the same person in one tax year do not exceed £250 in total.
Annual exemption: Gifts not exceeding £3,000 in any one tax year to 5 April are exempt. This can apply to one gift or the total of number of gifts to which the small gift exemption does not apply. If the gifts made in one year fall short of £3,000, any surplus can be carried forward to the next year (but no further) and can be used once the exemption for that year has been used up in full. But the exemption cannot be carried back to earlier years.
Gifts on marriage or civil partnership: For the gift to be effective for inheritance tax purposes, it has to have be made on or shortly before the marriage or civil partnership ceremony. The gift was made to one or both parties to the marriage or civil partnership. Became fully effective on the marriage or civil partnership taking place. The gift will be exempt up to the following limits:
- £5,000 or less, if the deceased was a parent or step-parent of one of the parties to the marriage or civil partnership.
- £2,500 or less, if the deceased was a grandparent or more remote relative of one of the parties to the marriage or civil partnership.
- £1,000 or less, in any other case.
Gifts made out of income: Gifts are exempt from Inheritance tax if it can be shown that they were a regular part of the deceased’s expenditure and were paid out of their salary, without this having any impact on their normal standard of living. For example if the deceased had been paying a monthly payment to a relative out of their income, without it affecting their standard of living, then this would be exempt. For this exemption to apply it needs to be a regular, not a one-off payment.
Please note: If the total amount given in gifts by the deceased was higher than £150,000 the Deceased’s estate does not qualify as an Excepted Estate to complete IHT205. In order to proceed with the Return of the Estate for the Deceased, you will now need to complete an IHT400 Application along with the PA1 Application. The Return of the Estate cannot be completed using YouCanDoProbate. If this should happen to you, as long as you have not attempted to generate the Probate or Inheritance Tax forms, and the terms of our Refund Policy have not been breached, you will be able to take advantage of our money back guarantee.