Gift Exemptions & Estate Taxes
Some gifts are exempt. When calculating the value of an estate, the following are exempt from inclusion as at late 2003:
Wedding gifts of up to £5,000 to each of child of the deceased (including step-children and adopted children) or the person that child is marrying
Wedding gifts up to £2,500 to each grandchild or the person that the grandchild is marrying
Wedding gifts of up to £1,000 to anyone else
Payments for the maintenance of spouse of the deceased, or ex-husband or ex-wife, dependent relatives and, usually, children who are under 18 or in full-time education
Other gifts up to a value of £3,000 in any one tax year, plus any unused balance of £3,000 from the previous tax year (The tax year starts on 6 April in one year and ends on 5 April in the following year.)
Outright gifts in any tax year up to a total of £250 each to any number of people, but only if the total of all gifts made to the recipient in the same tax year does not exceed £250
Gifts can be made from more then one of the above heading and still be excluded from the calculation. For example, to a child in the year they marry, you could give £5,000 as a wedding gift plus £3,000 as another gift and these would be exempt.
How do I value the gift for inheritance tax?
The value of the gift for inheritance tax is the amount of the ‘loss to the estate’. This is worked out by looking at the value of the estate before and after the gift was given away. In the case of a cash gift, the loss is the same value as the gift. But this is not the case with all gifts.
Example, Mr Smith owns a pair of vases. As a pair they are worth £1million, but a single vase is worth only £400,000. Mr Smith gives one of the vases to his son. The gift, for the purposes of inheritance tax, is not simply the £400,000 vase. Before the gift, Mr Smith’s estate included the pair of vases worth £1million. Afterwards he owned one vase worth £400,000. The value of the gift for inheritance tax is £600,000 (£1million less £400,000). This shows the ‘loss to Mr Smith’s estate’.
Is there any relief available on the tax paid on gifts?
Yes. There is a special relief known as ‘taper relief’ that may be available. If the total chargeable value of all the gifts made between three and seven years before death is more than the taxable threshold at death, then taper relief will be due. The relief reduces the amount of tax payable on a gift – it does not reduce the chargeable value of the gift. The reduction made is shown below.
Number of years between the gift and death
Tax charged reduced by
0 – 3 No relief
3 – 4 20%
4 – 5 40%
5 – 6 60%
6 – 7 80%
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