Everyone can give away gifts on their death (and in the seven years prior) up to a limit without paying Inheritance Tax (“IHT”) on these gifts. The limit is called the Nil Rate Band (“NRB”) and for the current (2010/11) tax year it is £325,000. Any Estate over the NRB is taxed at 40%.

Someone’s Estate consists of all their assets (and their share of co-owned assets) and includes all gifts made before death. However there are some exemptions:

• All gifts between spouses and civil partners (provided the spouse spouse/civil partner of a deceased UK domiciled person is also UK domiciled – otherwise maximum £55,000).


• Wedding gifts (up to £5,000 to children (each parent has their own exemption), £2,500 to grandchildren or great grandchildren (each grandparent or great grandparent has their own exemption), £1,000 to any one else).


• Small gifts totalling no more than £250 to any one person in a tax year.


• Gifts totalling over £250 to any one person in any tax year up to a maximum of £3,000 for all such gifts.


• Donations to charities, bodies such as National Trust etc. or recognised political parties.


• Regular transfers made from taxable income (provided your standard of living is not reduced).


• Overseas assets are excluded from the Estate if you are not UK domiciled.


• Certain business assets and agricultural land if owned for at least 2 years.


• Any non-exempt gift (i.e. any gift not covered by the above exemptions) made more than 7 years before death is free of IHT. If the value of such gifts made in the 7 years prior to death exceeds the NRB in force at the date of death there is a sliding scale for the rate of IHT payable on the excess, (i.e. 8% for the excess made between 6 and 7 years of death, 16% for the excess made between 5 and 6 years of death, 24% for the excess made between 4 and 5 years of death, 32% for the excess made between 3 and 4 years of death and 40% for the excess made within 3 years of death).
  [Note1. if the value of non-exempt gifts made in the 7 years prior to death does not exceed the NRB in force at the date of death there is no IHT saving.
  Note 2 non-exempt gifts made in the 7 years prior to death use up the NRB first, e.g. if someone made non-exempt gifts totalling £250,000 in the 7 years prior to death only £75,000 of the NRB remains to be set against the estate left on death or if the non-exempt gifts in the 7 years prior to death totalled £350,000 then all the Estate left on death is subject to IHT.]

•n.b. a gift with reservation (i.e. a gift made during the lifetime of the Donor but the Donor retains the benefit of the gift, e.g. a house given by a parent to the children but the parent stays in the house without paying a reasonable level of rent) does not count as a gift for IHT purposes and the gifted asset is deemed to remain an asset of the Donor.


To see how the Transfer of the Nil Rate Band works click here