Inheritances and gifts may bring only positive associations to mind, but it is worth remembering that they come with certain tax burdens. Inheritance Tax and tax on gifts are part of British tax law, so it is worth paying attention to how they work so you know what to prepare for.

Summary & key takeaways

  • Inheritance Tax applies only to estates above the inheritance tax threshold.
  • The tax must be paid within 6 months of the end of the month of death.
  • Where the estate is property, the tax can be paid in instalments over 10 years.
  • A gift made 7 years before death is free of inheritance tax.
  • You can give away £3,000 a year tax-free, plus £250 gifts to any number of people.

What is Inheritance Tax? How does it affect gifts?

It is worth mentioning at the outset that inheritance tax only applies to estates whose value is above the inheritance tax threshold. In most cases, Inheritance Tax applies to the estate left by a deceased person, but it can also cover trusts and gifts made during a person’s lifetime. Paying the tax is usually the responsibility of the executor of the will or a representative.

Where the estate is worth more than the inheritance tax exemption threshold, the tax can be avoided through Lifetime Gifts - gifts made during one’s lifetime, which are not subject to inheritance tax.

Deadlines for paying the tax

In most cases, inheritance tax must be paid within 6 months of the end of the month in which the deceased died. If the payment is not made, interest is charged, so it is worth making sure the tax is paid on time. It is worth noting, however, that where the inheritance takes the form of property, the tax can be paid in instalments spread over 10 years.

Tax reliefs

For both inheritance tax and gifts, we can count on reliefs and exemptions in particular cases.

  • Spouse exemption - if a spouse receives an inheritance and resides in the United Kingdom, no inheritance tax applies, even if the estate exceeds the relevant threshold.

  • Charity exemption - whether made during a person’s lifetime or after death, gifts to charities registered in the UK are not subject to tax.

  • Potentially exempt transfers - if you make a gift and survive for seven years from that point, the amount is not subject to tax, regardless of its size.

  • Annual exemption - each year you can give away £3,000 as gifts (a single gift or split into several smaller ones) without any tax liability.

  • Small gifts exemption - gifts of £250 can be given to any number of people without being taxed.

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