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Which gifts to include in your valuation

Some gifts are exempt from Inheritance Tax - especially any gifts made more than seven years before the deceased died. However, not all gifts are exempt.

If the deceased didn’t leave a list of all of the gifts they made before they died, you should make a list of them and determine which are exempt and which aren’t.

You can try asking close friends and family if they know about any gifts or look through paperwork or bank statements that the deceased left.

Your valuation should include:

• any assets - including cash - given away in the seven years before the death
• any assets that the deceased gave away at any time, but in which they kept an interest - for example, a house they gave away but lived in rent-free
• gifts into trusts - although some Inheritance Tax may have been paid on these gifts when they were made
  

• Gifts that are exempt from Inheritance Tax

• Passing on your home to your children

• Inheritance Tax on transfers into trust

How to work out the value of gifts

In most cases, the value that you need to include is the value of the gift at the time it was made. However, if the deceased had assets that were worth more combined than they were split, and before they died they gave part of them away as a gift, there will be a loss of value from the deceased's estate that is more than the simple value of the gift. Inheritance Tax applies to the loss of value from a person’s estate.

In these situations, the value that you should use is the total value of the combined assets minus the value of the asset retained.

Example one

Sue has a set of two paintings that together are valued at £100,000. She gives one of them to her daughter two years before she dies. Valued separately, each picture is worth only £30,000.

In giving the gift to her daughter, Sue’s estate is considered to have suffered a loss greater than the value of the gift. Therefore, the value that you have to use in this example is not half the original value for the two paintings, but the value of the loss to the estate.

This is £70,000 (£100,000 minus £30,000, or the total value of the two paintings minus the value of one painting).

Example two

Storey's Publishing Ltd is a private company that’s issued 10,000 shares. Garry holds 6,000 of them - which gives him a controlling shareholding of 60 per cent. Because he has a controlling shareholding, the shares are worth £100 per share (£600,000).

Shortly before he dies, Garry gives Michelle 2,000 shares. Shareholdings that represent less than 50 per cent of the company are worth only £75 per share. So his remaining 4000 shares are valued at just £300,000 (4,000 × £75). Before making the gift Garry's estate included shares worth £600,000. So the gift represents a loss to his estate of £300,000.

Therefore, the value of his gift for Inheritance Tax purposes is not £150,000 (2,000 shares at £75 per share) but £300,000 (£600,000 minus £300,000).

• How to value stocks and shares for Inheritance Tax

If the total gifts are more than the Inheritance Tax threshold

If the total value of the gifts that the deceased made is more than the Inheritance Tax threshold (£325,000 in 2012-13 tax year), tax will be payable on all of the gifts that brought the total over the threshold. Gifts always use up the Inheritance Tax threshold first before the value of any other assets or property that the deceased left.

To identify which gifts you need to pay tax on, follow these steps:

Step one: list in date order all of the gifts the deceased made in the last seven years that aren't exempt, starting with the oldest first

Step two: keep a running total of their values

Step three: when the running total exceeds the threshold, that gift - or the part of it that took the total over the threshold - and all gifts made after it will be subject to Inheritance Tax

Example

Masood died on 1 June 2023 when the Inheritance Tax threshold was £312,000. In the seven years before he died, he gave the following gifts (after deducting all those that were exempt).

When the March 2004 gift is added, the running total goes over the threshold. So Inheritance Tax is due on that gift and all of the later gifts.

However, on the gift made in March 2004, Inheritance Tax is only due on the part of the £15,000 gift that brought the total above the threshold. So for that gift, tax is payable on £3,000 (£315,000 running total - £312,000 threshold = £3,000 excess over the threshold).

Applying ‘Taper Relief’ to gifts

Inheritance Tax is charged at 40 per cent. But if the person died between three and seven years of making a gift, you can apply what's known as 'Taper Relief' to the amount of Inheritance Tax due to reduce the amount payable.

Taper Relief reductions

Example

Joe made a gift of £350,000 on 15 January 2006. He died on 15 April 2009. The Inheritance Tax threshold for the year he died is £325,000.

Follow the steps below to work out the Inheritance Tax due:

Step 1 - take away the threshold from the value of the gift: £350,000 − £325,000 = £25,000. So Inheritance Tax is due on £25,000.

Step 2 - work out the Inheritance Tax at the full rate of 40 per cent: £25,000 × 40 per cent = £10,000.

Step 3 - the gift was made within three to four years of death. So Taper Relief at 20 per cent is allowed: £10,000 × 20 per cent = £2,000.

Step 4 - take away the Taper Relief from the full tax charge: £10,000 − £2,000 = £8,000.

In this example, Taper Relief reduces the amount of tax payable from £10,000 to £8,000.

Taper Relief and 'relevant property' trusts

If you're recalculating the tax due on assets that the deceased transferred into a relevant property trust less than seven years before they died, and Taper Relief means that the Inheritance Tax due on death will be less than the tax that has already been paid, Taper Relief won't apply but there's no further tax to pay.

• Inheritance Tax and trusts following a death

Useful contacts

• Probate and Inheritance Tax Helpline