If I make a gift of money to my children and then die within 7 years, are they immediately liable to IHT? If the gift comes jointly from my wife and me then what?

24 February 2022

Question by Ian

If I make a gift of money to my children and then die within 7 years, are they immediately liable to IHT? If the gift comes jointly from my wife and me then what?


Answered by Chris Broome

Hi Ian,

This is a great question to ask.

Most lifetime gifts directly made to individuals (or certain trusts) are potentially exempt transfers (often called PETs). ‘Gift’ and ‘transfer’ mean the same thing in the IHT world. PETs are treated as tax-free when you make them, and provided you survive for seven years after making the gift, no inheritance tax is payable. If tax does become due on a PET, the person who received the PET will be asked to pay the tax.

A simple example is below:

If you gift £100,000 to your children now, and die within seven years having no other gifting history, your children will have no tax to pay. However, the nil-rate band (currently £325,000) available to your estate will be reduced by the value of the seven year total of gifts. In this case your estate would have a £225,000 nil-rate band. So, the tax on the gift is effectively settled through your estate, which pays an extra £40,000 of IHT (40% of the £100,000).

If instead you gift £400,000 to your children, then on your death your estate would have a zero nil-rate band (it can’t be negative). Furthermore, the recipient of the gift has a £75,000 excess, on which 40% inheritance tax is due (£30,000). Care must be taken here, because, for example, gifting an equal amount to two children on different days in the same week would mean that the entire tax burden of the £75,000 excess would fall to the second recipient i.e., child one receives £200,000 and this is within the available nil-rate band. Child two receives £200,000 but with only £125,000 of the nil-rate band available.

There is a sliding scale reduction of the amount of tax payable when the gift is between three and seven years old. As the simple example shows, this is a complex area of the IHT rules.

Any gifts made jointly are treated as individual gifts of half the amount. Gifts between spouses are exempt.

If you are considering a gift that will take your seven-year total over £325,000 then you should seek professional advice specific to your situation.

I hope this helps. Please let me know if you have any more questions on this topic.

Answered by

Chris Broome

Chartered Financial Planner

My name is Chris Broome and I own a wonderful fixed-fee and independent financial planning practice called Longhurst.