Inheritance tax (IHT) was originally planned to only affect relatively wealthy families. Currently, IHT is levied on estates worth more than £325,000 and this worth can come from a number of assets including cash, possessions and investments. However, there is one part of an estate that has put IHT in the spotlight in recent years.

The government detail that there is usually no IHT to pay on small gifts made out of income such as presents.

On top of this, there is no IHT to pay on gifts given to spouses and civil partners.

It is possible to give gifts here with no limits so long as the person receiving the gift lives in the UK permanently.

What counts as a gift can be very broad. The state detail that anything that has value such as cash, property or possessions will be considered a gift.

If the person lives between three or four years between the gift being given and death than IHT will be reduced to 32 percent. Between four and five will see a reduction to 24 percent and five to six will be 16 percent.

If a person survives for six to seven years than a mere eight percent will be charged and for more than seven years no IHT will be due at all.

This tapering scale could be confusing with large estates and multiple assets but the government provides an example of how this would work in practice:

“Sally died on 1 July 2018. She was not married or in a civil partnership when she died.

“Sally left 3 gifts in the 7 years before her death:

“£300,000 to her brother 6.5 years before her death
“£50,000 to her sister 4.5 years before her death
“£150,000 to her friend 3.5 years before her death

“Sally is not entitled to any other gift exemptions or reliefs. There’s a £325,000 inheritance tax threshold. Anything below this amount is tax free.

“£300,000 is used up by the gift Sally gave her brother. There’s no tax to pay on his gift. The remaining £25,000 is used up by her £50,000 gift to her sister. There’s tax to pay on the amount not covered by the threshold. That means there’s tax to pay on £25,000 of the gift to Sally’s sister at a rate of 24 percent. The £150,000 gift given to her friend is taxed at a rate of 32 percent. Sally’s remaining estate was valued at £500,000 and charged at the usual 40 percent inheritance tax rate. Sally used up the tax-free threshold on gifts given before her death.”