What gifts are exempt from inheritance tax?

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Accepted Answer

## Gifts Exempt from Inheritance Tax

### What the law says

The Inheritance Tax Act 1984 (IHTA 1984) Part II sets out the following categories of exempt gift/transfer:

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**1. Transfers between spouses or civil partners (IHTA 1984, s.18)**
A transfer of value is fully exempt to the extent the value transferred becomes comprised in the estate of the transferor's spouse or civil partner. Where the transferor (but not the recipient spouse/civil partner) is a long-term UK resident, the exempt amount is capped at the nil-rate band threshold.

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**2. Annual exemption (IHTA 1984, s.19)**
Transfers of value in any one tax year are exempt to the extent the values transferred do not exceed **£3,000**. Any unused portion of the £3,000 can be carried forward to the next year only.

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**3. Small gifts (IHTA 1984, s.20)**
Outright gifts to any one person in a tax year are exempt if the total values transferred to that person do not exceed **£250**.

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**4. Normal expenditure out of income (IHTA 1984, s.21)**
A transfer is exempt if it is shown that:
- it was made as part of the **normal expenditure** of the transferor;
- it was made **out of income** (taking one year with another); and
- after allowing for all such transfers, the transferor was left with **sufficient income to maintain his usual standard of living**.

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**5. Gifts in consideration of marriage or civil partnership (IHTA 1984, s.22)**
Gifts made in consideration of marriage or civil partnership are exempt up to:
- **£5,000** — from a parent of a party to the marriage/civil partnership;
- **£2,500** — from a remoter ancestor or from a party to the marriage/civil partnership to the other party (or settled by them);
- **£1,000** — in any other case.

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**6. Gifts to charities (IHTA 1984, s.23)**
Gifts to charities are exempt transfers. Additionally, where sufficient gifts to charities or registered clubs are included in a death estate, a **reduced rate of IHT** (10%) may apply.

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**7. Gifts to political parties (IHTA 1984, s.24)**
Gifts to qualifying political parties are exempt. The former £100,000 cap on gifts made on or within one year of the transferor's death was removed with effect from 15 March 1988.

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**8. Gifts to housing associations (IHTA 1984, s.24A)**
A transfer of value is exempt to the extent the value transferred is attributable to **land in the United Kingdom** given to a **registered housing association**. This applies to transfers made on or after 14 March 1989.

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**9. Gifts for national purposes (IHTA 1984, s.25 and Sch.3)**
Gifts to institutions listed in Schedule 3 to IHTA 1984 (e.g. national museums, galleries, and similar approved institutions) are exempt.

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**10. Maintenance funds for historic buildings (IHTA 1984, s.27)**
Gifts into approved maintenance funds for historic buildings are exempt transfers.

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**11. Employee trusts and employee-ownership trusts (IHTA 1984, ss.28 and 28A)**
Gifts into qualifying employee trusts and employee-ownership trusts are exempt transfers.

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### HMRC guidance / practice

HMRC confirms that the **gifts with reservation** rules (FA 1986, s.102) do not apply to gifts that are exempt from IHT under the above provisions. Specifically, the pre-owned assets (POA) charge under FA 2004, Sch.15 is also disapplied where property would be subject to a reservation of benefit but for the following exemptions: gifts to charities, gifts to political parties, gifts to housing associations, gifts for national purposes, maintenance funds for historic houses, and employee trusts.

> **Note:** A gift to a spouse or civil partner is treated separately — it is an **excluded transaction** under FA 2004, Sch.15, para.10(1)(b), rather than being disapplied under the POA exemption provision.

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