In the complex world of UK taxation, understanding gifting rules is key strategy for effective succession planning and managing Inheritance Tax (IHT) liabilities.  

This article delves into the UK gifting rules, with a special focus on Potentially Exempt Transfers (PETs) and regular gifts from excess income. 


The Basics of UK Gifting Rules 

Under current UK law, Inheritance Tax is typically charged at 40% on estates valued over £325,000 (the nil-rate band). However, strategic gifting can help reduce this tax burden significantly. Here are some key points to remember:  

  • Annual Exemption: You can give away up to £3,000 worth of gifts each tax year without them being added to the value of your estate. 
  • Small Gifts Exemption: You can make small gifts of up to £250 to any number of people each tax year. (You cannot combine this with the £3,000 exemption above).  
  • Wedding Gifts: Parents can give up to £5,000, grandparents up to £2,500, and anyone else up to £1,000, as wedding gifts. You can combine this with the £3,000 exemption and each parent has their own allowances.  
  • Gifts to Charities and Political Parties: These are exempt from Inheritance Tax. 


Understanding Potentially Exempt Transfers (PETs) 

Potentially Exempt Transfers are larger gifts that become exempt from Inheritance Tax if the donor survives for seven years after making the gift. If the donor dies within this seven-year period, the gift is deducted from the Nil Rate Band of £325,000. If the value of the gift exceeds £325,000 then IHT will be chargeable on the gift, payable by the person who received the gift. It is possible to insure this liability.  


The Importance of Documenting PETs 

Proper documentation of PETs is important for several reasons:  

  • Clarity for Executors: It helps your executors understand your gifting history when managing your estate. 
  • HMRC Compliance: In the event of an HMRC investigation, clear records prove the timing and nature of gifts. 
  • Family Harmony: Detailed records can prevent disputes among beneficiaries about past gifts. Discussing plans as a family can also have a positive impact and avoid challenges during probate.  


Gifts from Excess Income: A Powerful Strategy 

One of the most underutilised exemptions in Inheritance Tax planning is gifting from excess income. These gifts are immediately exempt from Inheritance Tax, provided they meet certain criteria:  

  • The gifts are made from surplus income. 
  • The gifts are part of a regular pattern of giving. 
  • The gifts do not reduce the donor’s standard of living. 


Ideally, you should have a simple plan to assess the value of each regular gift. Such as “I will gift 50% of my surplus income every year”. This also gives flexibility and accepts that your expenditure may change. HMRC deem that income gains the nature of capital after two years, thus the suggestion of annual gifting.  


Recording Gifts from Excess Income 

Good record-keeping is essential when making gifts from excess income. You should document:  

  • Your income and expenditure, to demonstrate surplus income. 
  • The regularity and number of gifts made. Stating that gifts are intended to be part of a future regular pattern evidences this exemption, even if only one gift is made before death.  
  • Evidence that your standard of living was maintained. 


Introducing Free Gifting Documentation Tools 

To simplify the process of recording both PETs and gifts from excess income, we’ve created two user-friendly forms:  

  • A record of gifts: This form allows you to record details of large gifts, including dates, amounts, and recipients and the relevant exemptions. 
  • A record of gifts from surplus income: This comprehensive form helps you record your income, expenditure, and regular gifts made from surplus income on an annual basis. 


These forms are available for free from our website, offering a useful way to maintain accurate records of your gifting activities. By using these tools, you can ensure that your estate planning efforts are well-documented and more likely to withstand scrutiny from HMRC. This is also very helpful for your executors and will ease the progress of probate proceedings, ultimately helping your loved ones.  

To download these valuable resources, to record Excess Income Gifts click here or to record Potentially Exempt Gifts click here.  

These forms are designed to be easy to use and can be updated regularly as you continue your gifting strategy. They also mirror HMRC’s IHT forms so your executors will have the information in the correct format.  


Empower Your Estate Planning 

Understanding and leveraging UK gifting rules can significantly impact your estate’s Inheritance Tax liability. By mastering the concepts of Potentially Exempt Transfers and gifts from excess income, and meticulously documenting these transactions, you can protect your legacy and ensure your wishes are carried out effectively. 

Remember, while gifting can be a powerful tool in estate planning, it’s always advisable to consult with a qualified financial advisor to ensure your strategy aligns with current legislation and your personal circumstances. This article in no way constitutes advice. Before making any financial decisions, it is recommended that you seek professional advice from qualified professionals, such as financial advisors, solicitors, and tax experts. These professionals can provide tailored guidance based on your specific circumstances, ensuring that your succession plan is legally compliant and optimised for tax efficiency.   

Take control of your estate planning today. Download our free PET and Excess Income Gifting forms and start your journey towards a more tax-efficient legacy. Your future self – and your beneficiaries – will thank you for your foresight and diligence. 

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