Could these gifts break IHT rules?

By THIS IS MONEY
Updated: 00:00 EST, 11 October 2008

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My daughter started at an independent school this autumn and her grandfather gave me £1,000 towards her school fees. Will inheritance tax be due on this gift if he dies in the next seven years?

School fees: Is IHT due on this £1,000 gift?

What if he gives a further sum? C.C.T., Edinburgh

I am 61 years old. Last year I gave £35,000 to my daughter from my savings.

My estate is unlikely to be above the threshold for inheritance tax so do I need to worry about the seven-year rule on gifts, or even tell anyone? J.B., Newcastle

Simon Moon from This is Money replies: Both these questions concern gifts of money, but the answer in each case is rather different. Let's start with the question from Edinburgh.

I am assuming the value of granddad's estate at death is likely to exceed the inheritance tax (IHT) threshold, which presently stands at £312,000.

He – or any of us for that matter – can give away up to £3,000 a year without having to worry about falling into the inheritance tax trap.

However, many people are unaware that gifts above this limit are permitted if it can be shown they are from income and not a case of granddad running down his savings to keep the money out of the taxman's grasp.

One way to demonstrate this would be to set up an arrangement so his bank transferred a sum each month. You would then be able to produce documentary evidence on his death that should be enough to satisfy the tax authorities.

The seven-year rule you refer to says that unless a person survives for seven years, any gifts they make that exceed permitted limits will be counted as part of their estate on death and liable to tax at 40%.

As for the question from J.B. in Newcastle, you have nothing to worry about and no need to tell anyone. If your estate will be below the IHT threshold, what you do with your savings is no-one else's business.

• Find out more in our special IHT section