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Who Pays Inheritance Tax on Gifts?

5th January, 2024

When it comes to paying inheritance tax on gifts, you may ask yourself questions about who carries the responsibility of inheritance tax when it comes to gifts.

Let’s explore the complications of inheritance tax on gifts in the United Kingdom and the key factors that determine who ultimately pays this tax.



  1. Understanding Inheritance Tax
  2. Lifetime Gifts and Potentially Exempt Transfers
  3. Gifts with Reservation of Benefit
  4. Recipients and Their Potential Liability
  5. Annual Exemptions and Small Gifts
  6. The Role of Trusts in Inheritance Tax Planning
  7. Why is Paying Inheritance Tax on Gifts Important?
  8. What Happens if You Don’t Pay Inheritance Tax on Gifts?
  9. Plan Your Inheritance Tax With Haggards Crowther


Understanding Inheritance Tax

Inheritance tax (IHT) is a tax imposed on the estate of a deceased person, including their:

  • Property
  • Money
  • Possessions

However, IHT is not confined to post-mortem scenarios alone – it can also apply to gifts made during your lifetime.

Around 3.7% of UK deaths result in IHT charges. Understanding the ins and outs of inheritance tax on gifts is a must for both the benefactor and the recipient.


Lifetime Gifts and Potentially Exempt Transfers

One avenue through which inheritance tax on gifts comes into play is through lifetime gifts. When you make a gift during your lifetime, it is known as a potentially exempt transfer (PET).

PETs become completely exempt from inheritance tax if the donor survives for seven years after making the gift. If the donor passes away within this seven-year window, the gift may be subject to inheritance tax on a sliding scale known as “taper relief.”

The responsibility of paying IHT on lifetime gifts primarily falls on the donor. However, if the donor fails to survive for the full seven years, the responsibility may shift to the recipient.

Not all lifetime gifts are treated equally, and certain exemptions and reliefs may apply based on the nature and size of the gift.


Gifts with Reservation of Benefit

While the general rule is that the donor pays inheritance tax on lifetime gifts, there are exceptions. If a donor makes a gift but continues to enjoy some benefit from the gifted property, it is considered a “gift with reservation of benefit.” In such cases, the value of the property is brought back into the donor’s estate for inheritance tax purposes.

If a donor dies within seven years of making a gift with a reservation of benefit, the responsibility for paying inheritance tax falls on the donor’s estate. This ensures that you cannot simply rid yourself of assets to avoid inheritance tax while still enjoying the benefits of those assets.


Recipients and Their Potential Liability

The donor typically bears the responsibility for paying inheritance tax on lifetime gifts, but there are scenarios where the recipient may become liable. If a donor makes a PET and passes away within the seven-year period, the commitment shifts to the recipient, who is then responsible for settling the inheritance tax.

This transfer of liability to the recipient is not automatic. The recipient must report the gift to Her Majesty Revenue & Customs (HMRC), and the inheritance tax is usually payable within six months of the donor’s death.

Failing to report the gift or pay the tax on time can lead to penalties and interest charges. In cases where the donor’s estate is insufficient to cover the inheritance tax, the recipient may be required to use their own resources to settle the outstanding amount. This potential liability emphasises the importance of clear communication and a thorough understanding of the implications for both parties involved in a lifetime gift.


Annual Exemptions and Small Gifts

To make inheritance tax on gifts more manageable, the UK tax system provides certain exemptions and allowances. One such exemption is the annual gift exemption, allowing you to gift up to a specified amount each tax year without incurring any inheritance tax liability. The annual gift exemption is £3,000 per donor.

This means that you can gift up to £3,000 per tax year without the gift being subject to inheritance tax, regardless of whether the donor survives for seven years. Additionally, any unused portion of the annual exemption can be carried forward to the following tax year.

In addition to the annual exemption, small gifts made to any number of recipients are also exempt from inheritance tax. The small gift exemption allows for gifts of up to £250 to be made to any number of people without triggering inheritance tax implications.

These exemptions provide you with a valuable mechanism for transferring money to your loved ones without incurring significant tax liabilities.

Be sure to stay informed about any changes to tax laws and allowances, as these may be subject to revision by HMRC.


The Role of Trusts in Inheritance Tax Planning

Trusts play a key role when it comes to inheritance tax planning, offering a means to pass on assets while potentially reducing tax liabilities. If you place assets in a trust, you can maintain a certain amount of control over those assets while designating beneficiaries who will ultimately benefit from the trust.

One popular type of trust used for inheritance tax planning is the discretionary trust. In a discretionary trust, the trustees have the flexibility to decide how the trust assets are distributed among the beneficiaries. This flexibility allows for strategic decision-making, considering factors such as the beneficiaries’ financial needs and the overall tax implications.

While trusts can be powerful tools for managing inheritance tax, it’s important to note that they don’t come without challenges. The creation and management of trusts require careful consideration, and if you feel you could benefit from them, you should seek professional advice to ensure they remain compliant with relevant tax laws and regulations.


Why is Paying Inheritance Tax on Gifts Important?

Paying inheritance tax on gifts helps to maintain a fair and sustainable financial system. This tax ensures that as people pass their wealth onto their loved ones, a proportionate contribution is made to support public services and government initiatives.

Inheritance tax on gifts is typically paid by the recipient, but certain gifts within the tax-free allowance are exempt, ensuring that individuals can make tax-free gifts without incurring an inheritance tax bill. It is a way to share the benefits of your will and accumulated wealth with society at large.

When someone makes a gift, whether it’s a large sum of money or valuable assets, some of the inheritance tax helps fund essential public services such as education, healthcare, and infrastructure. Contributing a portion of the gift’s value means that you can help sustain the economic well-being of the community.

Moreover, paying inheritance tax on gifts promotes financial equality. It prevents the concentration of wealth in a few hands over generations. This ensures that everyone has a fair chance to succeed and build their own future.

In essence, inheritance tax on gifts is a mechanism for wealth distribution, supporting welfare and ensuring that the benefits of earned assets extend beyond individual families.


What Happens if You Don’t Pay Inheritance Tax on Gifts?

Failing to pay inheritance tax on gifts can lead to a range of financial consequences and legal complications.

Firstly, if the tax owed on a gift is not settled on time, there may be penalties and interest charges added to the original amount.

These additional costs can quickly add up, making the overall financial burden much heavier. Moreover, the authorities may take legal action to recover the unpaid inheritance tax. This can involve taking assets from the deceased person’s estate to cover the outstanding amount.

Failure to pay IHT on gifts can result in delays and disputes during the probate process, making it more challenging for beneficiaries to access their inheritances.

Additionally, not fulfilling inheritance tax obligations can affect the deceased person’s financial legacy. Assets that could have been passed down to loved ones may be used to settle the outstanding tax, potentially decreasing the overall value of the inheritance.

Be sure to address these obligations promptly to avoid such complications and ensure a smoother transfer of assets to the rightful inheritors.


Plan Your Inheritance Tax With Haggards Crowther

Inheritance tax on gifts in the United Kingdom is a huge topic, influenced by factors such as:

  • The nature of the gift
  • The duration of the donor’s survival
  • The presence of reservations of benefit

While the general principle is that the donor is responsible for paying inheritance tax on lifetime gifts, there are instances where the burden may shift to the recipient.

Understanding the ins and outs of inheritance tax can be tough, and requires a thorough understanding of the rules and regulations governing gifts and estates.

If you are looking to make lifetime gifts or incorporate trusts into your estate planning should engage with financial and legal professionals to ensure that their actions align with the current tax landscape.

Here at Haggards Crowther, we understand that nobody likes to think of a time when they are not around; however, planning as a family to minimise IHT requires careful consideration.

Our team can help advise you on how to make the best use of annual and IHT allowances, why you should have a will in place, how to deal with any misconceptions about HIT charged on your gifts, advice regarding the 7-year Inheritance tax rule and much more.

Start planning early and discuss your options with us. Each year that passes, you lose access to annual allowances. To speak to a member of our team or for more advice regarding Inheritance Tax, contact us today!