With Christmas rapidly approaching, many people will be in the giving spirit and, in addition to the usual seasonal gifts, often take this opportunity to make gifts of cash to reduce the value of their estate for Inheritance Tax purposes.

As a recap, when lifetime gifts of cash are made outright to individuals, they are classed as Potentially Exempt Transfers (PETs). This refers to the fact that if you make the gift and survive for 7 years then the value falls out of your estate for Inheritance Tax purposes. However, if you die within 7 years of the gift, then the PET fails and the value is brought back into account on death for Inheritance Tax purposes.

However, certain gifts of cash are exempt for Inheritance Tax purposes, and include:

• £250 can be given to any individual person free of Inheritance Tax any financial year (i.e 6 April to 5 April). For example, if you are feeling generous you could give £250 to each of your 10 closest friends. This would be seen as 10 individual gifts of £250 and you will therefore reduce your estate by £2,500, free of Inheritance Tax.

However, a word of warning: if you give more than £250 to any one individual then the whole amount will be brought back into account for Inheritance Tax purposes, not merely the amount exceeding £250. 

• £3,000 can be given away free of Inheritance Tax in any financial year. If you did not use the allowance in the previous year then it can be carried forward one financial year, allowing you to make a gift of £6,000 in that year. It is worth noting that a couple can therefore make gifts of £6,000 per year (or £12,000 if they both have an unused annual allowance from the previous year).

• Excess income can be given away if it is part of normal expenditure, comes from income, and leaves the donor with enough income to maintain their usual standard of living. To show that the gift is part of normal expenditure it is best to establish a regular pattern to it. However, there is no limit on the amount of the gift so long as it is out of income.

For example, Miss Chance has excess income (after the payment of bills and usual expenses) of £500 per month. She therefore decides to pay the rent for her niece’s apartment on an ongoing basis, which is £450 per month. So long as Miss Chance’s excess income does not decrease, these payments would be exempt for Inheritance Tax purposes.