'It’s your birthday! Collect cash from each player’—the Inheritance Tax-friendly way

At the outset, you can rid yourself of any guilt associated with receiving a cash gift as your relatives may in fact be enjoying the two-fold benefit of making a gift to you while also reducing the size of their ‘community chest’—in Monopoly terms—to mitigate their potential future Inheritance Tax liability.

It is reassuring to know that any birthday and Christmas gifts, regardless of their size, will usually qualify as ‘normal expenditure out of income’, if such gifts can be shown to be given as part of a regular pattern, which is usually the case due to the annual occurrence of such gifts.  

For any gifts that are not specifically for birthdays or Christmas, an individual may make small gifts of up to £250 per person per tax year. This type of gift, referred to as ‘small gifts’, can be made to an unlimited number of recipients in one tax year, however, it is important to note that this allowance cannot ever be used in conjunction with another allowance or exemption, such as the annual exemption discussed below. 

Another largely unknown Inheritance Tax tool to make use of is the ‘normal expenditure out of income’ exemption, which applies where a taxpayer can show a gift: 

• formed part of their normal expenditure
• was made out of income, such as employment, pension, rental, interest and dividend income (the main point is that gifts utilising this exemption cannot be paid from capital, such as savings or investments)
• did not leave the person making the gift without enough income for them to maintain their normal standard of living.

As with the making of birthday and Christmas gifts, a consistent pattern does have to be established for one to claim the exemption, though, if utilised correctly, this exemption can be a valuable tool in reducing the size of one’s estate and being able to pass cash onto those who may need it more, without needing to involve often complex trust structures, for example. 

Crucially, normal expenditure out of income gifts are not subject to the seven year rule which applies to potentially exempt transfers of lump sums of capital.

If you are not able to make use of the exemption above, due to only being able to make gifts out of capital, rather than surplus income, then you may instead opt to fully utilise your annual exemption when it comes to lifetime gifting. 

Each tax year, an individual can give away up to £3,000 (known as their ‘annual exemption’) and an individual can determine whether this £3,000 is given to one person or split between multiple people. 

If you do not use your annual exemption (or all of it) in one tax year, then you may carry this forward into the next tax year, meaning that you may be able to make £6,000 worth of gifts in one tax year by carrying forward your unused exemption from the previous tax year. 

If you are UK domiciled and married or in a civil partnership with another UK domiciled individual, then you can transfer unlimited sums between each other. This applies during your lifetime and on your death. 

Further advice should be sought if your spouse or civil partner is classified as ‘non-domiciled’, under the current rules, which are set to change in 2025, as the exemption then becomes limited. 

Aside from getting married yourself, each tax year you are able to gift the following to specified individuals on a tax-free basis: 

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person

Unlike with the £250 small gifts allowance, the wedding allowance can be aggregated with another unused allowance available in the same tax year, such as your annual exemption, to allow you to gift more (if you are feeling generous.) It is important to be timely in giving this gift to successfully qualify for the exemption and to ensure the gift is made in contemplation of the recipient’s marriage, such as before the day or on the day itself. 

Gifts to UK-registered charities are exempt, in any amount, as well as gifts to political parties, who have at least two current Members of Parliament elected to the House of Commons or have only one Member of Parliament but achieved at least 150,000 votes in the most recent election.