What counts as a gift for inheritance tax purposes?

Start with the definition

For inheritance tax, a gift is much wider than handing someone cash in a birthday card. The law asks one question: did the transaction reduce the value of your estate without full value coming back in return? If yes, you have made a transfer of value, and the gift rules are engaged. That catches money, property, land, shares and possessions, but also forgiven loans, assets sold to family at a discount, and premiums paid on a life policy for someone else. It does not catch anything you leave in your will, which is estate, not gift, and it does not catch transfers fully covered by an exemption, such as the £3,000 annual exemption or gifts between spouses.

Getting the definition right is the foundation for everything else in gift planning: the 7-year rule and taper relief only matter once something actually is a gift, and the most expensive mistakes happen when people assume something is a gift when the law says it never left their estate at all. Inheritance tax works on the same basis in England, Wales, Scotland and Northern Ireland, so everything on this page holds wherever in the UK you live; treat it as general information rather than legal or financial advice.

The legal test: a transfer of value, measured by loss to your estate

HMRC's own definition, set out in the Inheritance Tax Manual at IHTM04024, is that a transfer of value is a disposition which reduces the value of the person's estate. Two features of that test do most of the work:

• It measures the loss to the giver, not the gain to the recipient. If giving away one share out of a controlling shareholding destroys a control premium, the loss to your estate can be far larger than the market value of the single share transferred.
• It does not require generosity or intent. Any disposition that leaves your estate poorer can qualify. There is a carve-out for genuine commercial bargains with no gratuitous intent, so a bad investment or an arm's length sale that turns out badly is not a gift. A deliberate undervalue sale to your daughter is.

GOV.UK's gifts guidance translates the test into examples: money, household and personal goods (furniture, jewellery, antiques), a house, land or buildings, listed stocks and shares, and, crucially, "any money you lose when you sell something for less than it's worth". That last one is the part gift, or bad bargain, rule. Sell your £400,000 house to your child for £250,000 and you have made a £150,000 gift, with a 7-year clock attached to it, even though money changed hands and a solicitor handled the conveyancing.

Is it a gift? Common scenarios

Scenario	Gift for IHT?	Why
Cash handed to a child for a house deposit	Yes	Straightforward transfer of value; a PET, exempt if you survive 7 years
Selling a £400,000 property to family for £250,000	Yes, £150,000	The shortfall against market value is a part gift
Writing off a £20,000 loan to your son	Yes	Releasing the debt reduces your estate by the amount waived
Paying a grandchild's university fees each term	Usually yes	A transfer of value, unless covered by the annual exemption or made as regular gifts from surplus income
Adding a child as joint owner of your bank account	Potentially	To the extent they can and do treat the money as theirs, value has shifted; the analysis is fact-specific and worth taking advice on
Leaving your house to your children in your will	No	Assets passing on death are estate, not lifetime gifts; different rules apply
Giving your house away but continuing to live in it rent free	No effective gift	A gift with reservation of benefit: the house stays in your estate regardless of the 7-year rule

PETs and chargeable lifetime transfers: two very different clocks

Once something is a gift, it lands in one of two boxes.

Potentially exempt transfers (PETs). Outright gifts from one individual to another are PETs. No tax is due when you make them, and GOV.UK confirms that no tax is due at all if you live 7 years after giving them. Die within 7 years and the gift "fails": it comes back into the inheritance tax calculation, using up nil-rate band first, with any tax on gifts above the £325,000 band reduced on a sliding scale if you survived at least 3 years. The mechanics of that clock, including the order gifts are set against the band, are covered in our dedicated guide to the 7-year rule, and the sliding scale in our taper relief explainer.

Chargeable lifetime transfers (CLTs). Gifts into most trusts (discretionary trusts and most other lifetime settlements) are chargeable immediately, not potentially exempt. Under GOV.UK's trusts and inheritance tax guidance, where your cumulative transfers into trust exceed the £325,000 nil-rate band, the trustees pay tax at 20% on the excess at the time of the gift (more if you pay the tax yourself, because the tax is grossed up), with a further top-up to the full 40% rate possible if you die within 7 years. The trust then lives inside its own regime of 10-year anniversary charges and exit charges of up to 6%. Trust gifting can still be a sensible planning tool, but it is a job for a specialist adviser, not a form-filling exercise.

The big trap: gifts with reservation of benefit

Few mistakes in this area cost more than the one made by the parent who transfers the family home to the children, keeps living in it, and believes the 7-year clock is running. It is not. This is a gift with reservation of benefit, and the rules, which apply to gifts made on or after 18 March 1986 per HMRC's manual at IHTM14311, treat the property as remaining in your estate for inheritance tax however long you survive. GOV.UK's examples include giving your home to a relative while still living there, and giving away a caravan you carry on using for free. The legal ownership has moved; the tax position has not.

The consequences stack up badly. The house is taxed in your estate at death as if you never gave it away, yet you no longer own it, which can complicate the residence nil-rate band and means your children have owned it for capital gains purposes without living in it. And the arrangement delivers none of the care-fees protection people often hope for either (see the next section).

There is an escape route. GOV.UK's guidance on passing on a home confirms that if you give your home away and continue living there, the gift can still work provided you pay the new owners rent at the going market rate, contribute your share of the bills, and keep that up for at least 7 years (no rent is needed where you give away only part of the property and the new owners live there with you). In practice the rent must be genuinely commercial and reviewed as market rents change, the new owners pay income tax on it, and the arithmetic rarely flatters the arrangement. Anyone considering it should take professional advice first, not after signing the transfer.

Gifts vs deprivation of assets: two different rulebooks

One distinction is worth pinning down before any planning decision, because the two regimes run on completely different rules. Everything above is HMRC's inheritance tax regime. Deprivation of assets is a separate concept applied by local authorities when means-testing you for care fees: if the authority concludes that avoiding care costs was a significant motive for giving assets away, it can assess you as though you still own them. There is no 7-year time limit in the care-fees rules. Surviving 7 years can take a gift out of inheritance tax entirely while giving you zero protection on care fees, and a gift with reservation fails on both fronts at once. If care planning is part of your motivation, the two regimes need to be considered together, by someone qualified to advise on both.

What does NOT count: the exemptions

Some transfers are carved out of the gift net completely: they never start a 7-year clock and never need to survive one. In one line, the main carve-outs are unlimited gifts to a UK-resident spouse or civil partner and to charities or political parties, the £3,000 annual exemption, £250 small gifts per recipient, tiered wedding gifts of up to £5,000, and regular gifts made from surplus income. The full figures, the stacking rules and the traps sit in our guide to the wedding and small gift exemptions, and the surplus-income route, with its record-keeping demands, has a dedicated guide to the normal expenditure out of income exemption.

The underlying figures are confirmed on GOV.UK's inheritance tax gifts page. A useful mental model: the definition decides whether something is a gift at all, the exemptions decide whether it drops out immediately, and only what survives both stages goes on to face the 7-year rule.

If you are an executor: the lookback duty

This definition is not just a planning question. Executors administering an estate must identify the deceased's lifetime gifts and report them on schedule IHT403 alongside form IHT400: gifts made in the 7 years before death, plus any gifts with reservation of benefit made on or after 18 March 1986, however old. That includes the non-obvious ones, undervalue sales, waived loans, joint account arrangements. Bank statements going back 7 years are the usual starting point. Our executors hub and guide to executor duties cover where this fits in the wider job.

Where to go from here

Once you know a transfer counts as a gift, the next questions are whether an exemption removes it and, if not, what happens over the following 7 years. Start with our inheritance tax pillar guide for the full picture, check your position against the current thresholds, and use the IHT threshold calculator to see whether your estate, with planned gifts factored in, is likely to face a bill at all. Above all, before you sign anything, make sure the transfer you are planning is a genuine gift in HMRC's eyes and not a gift with reservation of benefit: unwinding a house transfer you kept living in is far harder than structuring it correctly first time. If that check raises any doubt, or you have already made a transfer this page describes, we can put you in touch with an estate-planning specialist to review the position, care-fees angle included, before you take the next step.