Gifts and inheritance tax

Examining three types of individual transfers which might be subject to IHT

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The politics of inheritance tax (IHT) are among the most controversial. IHT’s unpopularity is not simply because it brings together the two unfortunate certainties of life – death and taxes. Many see IHT as unfair because it is a tax on income which was taxed previously, when earned. One counter argument is that there are some instances where no tax is paid on the growth in value of assets and therefore it is, perhaps, right that they are taxed on death.

However, the principle behind IHT is not simply to penalise the rich, but to redistribute wealth. Without IHT, the children of the rich will stay rich. IHT redistributes the wealth of the rich so that some of it goes to the state, to be distributed for the benefit of all.

Whatever the political view, IHT is a financial fact. After years of rocketing house prices, many people will be caught by the IHT threshold and so they may need to take positive action to organise their affairs so as to reduce its impact.

This article considers three types of transfer an individual might make during their lifetime, each of which might be subject to IHT.

1 Exempt transfers

Exempt transfers fall into two categories: transfers which are exempt if made during lifetime or at death, and transfers which are exempt only if made during lifetime.

(a) Transfers made during lifetime or at death, which are tax free, are:

  • generally, transfers between spouses and civil partners are exempt without limit, both during lifetime and on death even where the couple is not living together (for as long as they are still married)
  • where the transferor is domiciled in the UK, but their spouse or civil partner is not, the exempt amount is restricted to a lifetime (not seven-year) total of £325,000 (which is expected to increase in line with future increases in the nil rate band)
  • gifts to charities
  • gifts of agricultural or business property (which can qualify for 50% or 100% depending on the nature of the property). Further details regarding agricultural and business property are given later in this article.

(b) Transfers made during lifetime only, which are tax free, are:

  • gifts on marriage. A mother or father can give up to £5,000 to their son or daughter free of IHT. Wedding gifts of up to £1,000 can be made by any person free of IHT
  • small gifts of up to £250 per donee per tax year
  • normal expenditure out of income, provided that it leaves the donor with sufficient income to maintain his/her normal standard of living
  • payments for family maintenance
  • an annual exemption of up to £3,000 in a tax year. Any unused annual exemption may be carried forward for one tax year only.

2 Chargeable lifetime transfers (CLTs)

The most common type of CLTs are gifts to a discretionary trust or gifts to other trusts made on or after 22 March 2006.

The value transferred for IHT purposes is the ‘loss to the donor’s estate’ as a result of the transfer, which is not always the same as the amount that the donee receives. This principle is particularly relevant if the donor gives shares in private or unlisted companies, as the value per share will increase depending on the number of shares owned by the shareholder. The value per share of a controlling shareholding is higher than the value per share if the shareholder does not have control.

The value of CLTs can be reduced by any available annual exemptions.

IHT is payable on CLTs on the amount exceeding the nil rate band (currently £325,000). The trustees will pay IHT at the lifetime rate of 20%. The nil rate band available on a CLT will be reduced by any CLTs which the donor has made in the preceding seven years.


In January 2022, John made a gift to a discretionary trust of £300,000. He had previously made a CLT, after annual exemption, of £150,000 in 2019.

IHT due on the gift made in 2022 is calculated as follows:

Gift to discretionary trust made January 2022


Less annual exemption 2021/2022


Less annual exemption 2020/2021 (brought forward)


Chargeable lifetime transfer


The nil rate band for 2021/22 is £325,000.
However, this is reduced by any CLTs made by John in the seven years prior to the gift (ie the CLT of £150,000 made in 2019).


Nil rate band at the date of the gift


Less CLT in previous seven years


Nil band remaining


CLT in January 2022


Less nil band remaining




IHT @ 20%


3 Potentially exempt transfers (PETs)

All gifts between individuals are PETs.

A PET is treated as an exempt transfer while the donor is alive, and so PETs will not give rise to a lifetime IHT charge.

A PET becomes an exempt transfer if the donor survives for seven years from the date of the gift. If the donor dies within seven years, an IHT charge will arise and tax will be payable by the donee. Taper relief reduces the tax payable where there are more than three years between the date of the gift and the date of death. Further details regarding the tax due on PETs at the time of a donor’s death are given later in this article.

Excluded property

Unlike capital gains tax, where certain assets (for example, cars) are treated as exempt, there is no general concept of exempt assets for IHT purposes. However, certain assets are regarded as ‘excluded property’ and are outside the scope of IHT. Details of assets which are regarded as ‘excluded property’ can be found in IHTA 1984 sections 6, 48 and 157.

Additional tax on death

On death, there are three types of transfer which are chargeable to IHT: ‘failed’ PETs (being PETs made by the deceased in the seven years prior to his/her death), CLTs made in the seven years prior to his/her death (additional tax may be payable on these transfers) and, finally, assets in the deceased person’s death estate.

The rate of IHT on death is usually 40%. To encourage people to leave part of their estate to charity, IHTA84/Sch1A provides that where at least 10% of a person's net estate is left to charity, the rate of tax charged is reduced to 36%. 

Death tax on PETs

If a donor dies within seven years of making the gift, IHT is due on any amount above the nil rate band in force at the date of death. However, the nil rate band is reduced by any CLTs made by the donor in the seven years before the PET. Accordingly, it is necessary not only to look back seven years from death, but also seven years from the date of the PET, in order to identify the balance of the nil rate band available).

IHT is due at 40% on a ‘failed’ PET on any amount above the nil rate band.

However, if there are more than three years from the date of the gift until the date of death, taper relief is available at the following rates:

Length of time between date of gift and date of death 

Taper relief


0-3 years


3-4 years


4-5 years


5-6 years


6-7 years


Where there are more than seven years from the date of the gift until the date of death, the PET becomes completely exempt and so, in effect, the tax is reduced by 100%.

Business property relief (BPR)

BPR is available if a donor makes a transfer of a relevant business property. BPR reduces the transfer of value for IHT purposes.

The definition of a relevant business property is given in section 105 IHTA 1984.

The transfer of any number of shares in an unlisted trading company owned by the donor for at least two years qualifies for 100% BPR. The transfer of shares in a quoted trading company, if the donor has voting control of the company, qualifies for 50% BPR. The 50% rate also applies to gifts of land & buildings and plant & machinery, where those assets are used by the donor’s partnership or by a company which he/she controls.

BPR is restricted on a transfer of shares if the company holds ‘excepted assets’ in the balance sheet. An ‘excepted asset’ is one which is not used wholly or mainly for trading purposes or is not required at the time for future use in the business.

BPR is given before annual exemptions and is available to reduce the value of transfer for lifetime gifts. BPR is also available to reduce the value of business assets in a death estate. The relief is given automatically if the qualifying conditions are met.

Agricultural property relief (APR)

APR works in a similar way to BPR. APR reduces the transfer of value for IHT purposes by 50% or 100%. APR is available at 100% to a farmer who owns farmland and farm buildings and uses these assets in his business.

APR is available at 50% where the property is tenanted and let prior to 1 September 1995 and the lease has more than two years to run at the date of transfer. Otherwise, APR is given at 100%.

Further resources

ACCA technical factsheet: inheritance tax planning