Inheritance Tax Gift

First, remember that IHT is not about inheritance, it is a tax that arises on transfer of value, whether you are alive or dead. On death, the tax is applied to the total value of your estate (above the IHT threshold, currently £325,000 per person) because there is a transfer of value from you to those who inherit. Equally, however, there is a tax on transfers made whilst you're alive; and it happens to be at a lower rate of tax.

To minimise tax, the obvious thing to do would be to give everything just before you die, but this would deny the exchequer tax, so there are rules that say that transfers of value (gifts) made during your lifetime can be written back into your estate on death so it is fully taxed. However, it would be ridiculous to try to tax every transfer one ever made, so there are limits on time, and preposterous to tax generosity, so there are a number of exemptions.

The first important exemption is an annual limit of (currently) £3,000. If you don't use it all one year, you can carry it forward, but only into the next year (so you can't carry it forward for decades and build a big pot). The next is for gifts made to direct decendents (children and grandchildren) on such as marriage (£5,000 and £2,500, respectively). Finally, gifts made out of income are excluded. This is anything you give away on a regular basis that does not impact your own lifestyle; so, for example, if you're lucky enough to have a pension of £40,000 p.a. but your living costs are onby £30,000, you could happily give the rest away. BUT, when your executors the exemption, they'll need to be able to demonstrate the gifts were both regular and out of income (Schedule IHT419, I think).

Timewise, the first important date is 7 years. If a gift, no matter how large, was made more than seven years before your death its out of your estate (but beware, it may still be liable to tax at the lifetime rate if made within the preceding 7 years, i.e. 14 years before death). Any gift made in that seven year period, is a potentially exempt transfer (PET). If the PET falls within one of the exemptions, you're home and dry. If not, a sliding scale kicks, discounting the tax payable at 20% p.a. over years 3 - 7; i.e. Y1 = 0% discount, Y2 = 0%, Y3 = 20%, Y4 = 40% and so on until Y8 = 100% discount.

On the holiday front: if you pay for someone else's holiday and then pop your clogs within 7 years, it's going to be a PET unless you do it regularly and you're not eating up savings on the gift itself. If you've run out of annual allowance, then you'll just have to pay for yourself out of savings and take the grandchildren with you on a regular basis!