There are a number of items that are exempt from inheritance tax in the UK which revolve mostly around gifting and charitable donations.

In the UK, inheritance tax is charged on the estate when someone dies. The estate is made up of any wealth and valuables that the individual owns including property, land, vehicles, jewellery, cash in the bank, investments, art and more.

When the person dies, there is inheritance tax (IHT) which applies to those that inherit any wealth or property. There is a threshold of £325,000 so if the entire estate is worth this amount or less, no inheritance tax is due. However, any amounts above this are subject to 40% inheritance tax.

Example: An individual dies with an estate worth £1 million and wishes to leave this estate to their family and children. The first £325,000 remains tax-free, but in order for these funds to be released to beneficiaries, inheritance tax must be paid to the HMRC, which will be 40% of the remaining £675,000, totalling £270,000.

Items are exempt from inheritance tax include:

• Passing on wealth to spouses or civil partners
• Charitable donations and amateur sports clubs 
• Gifts made before deaths
• Small gifts and annual gifts 
• Wedding gifts
• Pensions

Passing on wealth to spouses or civil partners

When an individual passes away, any assets or wealth is immediately passed onto spouses or civil partners (unless stated otherwise in the will). This is not subject to any inheritance tax and the spouse will not be required to make any payments to the HMRC in this respect. This exemption applies regardless of the value of the assets.

Once this spouse passes away, both their assets will be combined and be liable for inheritance tax, unless it is below the £325,000 threshold. The tax will be paid by any beneficiaries of the estate such as children, siblings etc.

Charitable donations and amateur sports clubs

Charitable donations are a very viable tax exemption from inheritance tax. This is why you often hear of people leaving money to charity when they die or a sports club that they were passionate about. The charity needs to be a UK registered charity only and sadly does not apply to charities abroad.

Leaving money to charity and amateur sports clubs is not subject to any inheritance tax and if you decide to give more than 10% of your overall estate to charity, the IHT rate will be reduced from 40% to 36%.

Gifts made before death

A crucial and very common inheritance tax exemption is that there is no IHT tax on gifts (including giving cash to family) provided that it is 7 years before the death of the individual.

Of course, in most cases, one cannot predict when it will be 7 years before their death, but giving large sums to family members well ahead of time is not subject to any inheritance tax.

Similarly, if you give money to family members before the 7 years, there may be a sliding scale of tax (known as taper relief), if the amount is higher than the annual gifting allowance.

Small gifts and allowances (£3,000 per year and £250 to people)

The annual gifting allowances means that you can give up to £3,000 in gifts per year (cash, jewellery) which is tax free. So for those looking to reduce their potential inheritance tax by giving money to family, having a note of this allowance is key. This can often be used to give money to families for things like home improvements, pay school fees, holidays or similar.

Equally, the HMRC gives tax exemptions for any gift up to £250 which you can give to anyone and will not be subject to any tax.

Wedding gifts

On the subject of gifts, wedding gifts are exempt from tax and inheritance tax. Gifts for a wedding or civil partnership are tax-free including:

• £5,000 from a parent
• £2,500 from a grandparent or great-grandparent 
• £1,000 from anyone else you know

Pensions

Any pension pots that are left to children or beneficiaries are exempt from inheritance tax, on the basis that they are usually put into trusts.

Being a trust means that they are valued differently to the person’s estate and therefore they are not included in probate valuations.