The Inheritance Tax gift that keeps on giving

Will she or won’t she raise it? That’s the Inheritance Tax question many are asking of Chancellor Rachel Reeves ahead of her Autumn 2025 Budget. In this article, Consilium Tax Partner Craig Coyle looks at the state of play around gifting as a means of Inheritance Tax planning and the highly complex nature of tax law.

Following the changes to Inheritance Tax announced in the Budget in October 2024, there has been an increased focus on gifting as a means of Inheritance Tax planning. Rumours of further changes to make lifetime gifting less efficient in the forthcoming 2025 Budget have made this an even more topical area.

A PET is for life, not just for Christmas…

The starting point for tax is that most gifts are PETs (which has nothing to do with the adage that a puppy is for life, not just for Christmas). A gift will generally be considered a Potentially Exempt Transfer (PET). The exempt part means the gift will fall outside the taxable estate of the donor, but potentially highlights that there will be a requirement to survive for seven years from the date of the gift for the exemption to apply. The rate of tax applicable to the gift does, however, begin to taper annually after three years.

Inheritance Tax gifts, Capital Gains and ‘dry’ tax charges

Further care has to be taken where the asset gifted is one which is within the capital gains tax regime, for example, property or shares. A gift of a building or shares will (subject to the below) be taxed for capital gains tax purposes as a disposal at market value, and therefore potentially trigger a “dry” tax charge on the gift.

For example, Graeme bought a flat in 1983 for £20,000. He wants to gift it to his son, and it is now worth £180,000. Graeme will have tax to pay of circa £38,000. There would be no Land and Buildings Transaction Tax (LBTT) on a gift to another individual, as there is no consideration.

However, for gifts of certain trading assets, including shares in trading companies, a relief (known as gift and holdover relief) is available to defer the tax charge which would otherwise arise.

An Inheritance Tax gift example

For example, Dimitar owns 100% of the share capital in Oday Limited, a trading company worth £2m, and wishes to gift it to his son Ante. Dimitar started the company with £100 of share capital. The gift could therefore result in capital gains tax to pay of up to £480,000. Ante and Dimitar can enter into an election such that there is no taxable gain on the gift, with Ante retaining Dimitar’s base cost in the shares of £100, such that the gain will come into charge when he sells them.

Where the company has non-trading assets chargeable to capital gains tax (for example, a property not used by the business or an investment portfolio), there is a restriction on the effect of the election which needs to be considered carefully.

Confused? You will be…

The tax system also provides that certain gifts are not PETs and therefore are immediately out of the estate. These include, for example, a small annual allowance and gifts on the occasion of a wedding, subject to limits. The most important of these is where there is a pattern of gifts made out of income (i.e. out of annual income rather than diminishing capital). Care needs to be taken with the documentation of such gifts.

This is an area of tax law that is complex, confusing and prone to unexpected results.
Tax advice from a suitably qualified individual is important in making sure your gift does not result in a nasty surprise for you.

Helping people make tax-efficient decisions since 2013

Consilium Chartered Accountants are trusted Tax advisors to individuals and businesses. We offer the technical expertise needed to handle any UK Tax compliance issue and the proactive insight to help clients plan for and mitigate tax risks around Inheritance Tax and Personal Tax matters.

Follow Consilium Chartered Accountants on LinkedIn, X, Instagram and YouTube for updates and business insights.

Craig Coyle has been a qualified Chartered Accountant since 2001 and a Tax specialist for over 20 years. As Tax partner at Consilium Chartered Accountants, Craig advises business owners and entrepreneurs on all matters relating to Corporate Tax and Personal Tax. Craig is also a member of the Chartered Institute of Taxation.