Give with a warm hand – How smart gifting can protect your loved ones from Inheritance Tax
Inheritance Tax (IHT) is an increasingly pressing concern for families across the UK.
With frozen thresholds, rising property values, and changes to pension taxation on the horizon, more estates are falling within HM Revenue & Customs’ scope.
If you are looking to reduce the tax burden on your loved ones, gifting during your lifetime can be one of the most effective strategies.
However, it is not as simple as writing a cheque and hoping for the best.
Delaying gifts could increase your Inheritance Tax liability
Many people delay gifting because they worry about needing the money later.
That is understandable. In your sixties and early seventies, often referred to as the “active retirement” years, you may still be travelling, supporting children and grandchildren, or simply enjoying what you have built.
Gifting at this point can feel premature.
From an IHT perspective, the earlier you gift, the more effective it tends to be. Not only does this allow you to take advantage of the seven-year rule (where larger gifts fall out of your estate after seven years), but it also creates a pattern of gifting that HMRC is more likely to accept as part of your normal financial behaviour.
Unfortunately, many people wait until their late seventies or eighties, when they finally feel confident that “they won’t need that money.”
By then, the window for effective Inheritance Tax planning may have narrowed significantly.
The truth about annual gift allowances for IHT
Let’s break down the common gifting allowances under current IHT rules:
- Annual exemption – You can gift up to £3,000 per tax year to one or more individuals and carry forward one year’s unused allowance—so potentially £6,000.
- Small gifts – You can give up to £250 to as many individuals as you like, provided they haven’t received part of your £3,000 allowance.
- Wedding gifts – Up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to others.
These allowances have not changed in 40 years.
With inflation and rising living costs, they do not stretch as far as they once did, and relying on them alone will rarely solve an IHT issue.
Any gifts above these amounts are known as potentially exempt transfers (PETs) and are subject to the seven-year rule.
If you die within seven years of giving the gift, part or all of its value could still be taxed.
Gifts from surplus income – The most underused Inheritance Tax exemption
One of the least understood, yet most powerful IHT planning tools is the normal expenditure out of income exemption.
In simple terms, if you are earning more than you spend, you can gift the surplus regularly, and those gifts are immediately exempt from IHT, even if you die the next day.
The catch? You must:
- Show that the gifts came from income, not capital
- Maintain your usual standard of living
- Establish a pattern (typically three to four years is considered)
- Keep detailed records
Despite its potential, only around 430 families claimed this exemption in the 2022–23 tax year.
That suggests many people either are unaware it exists or assume it is too complicated to use, when in fact, the right accountant can help you build a simple, HMRC-compliant process to support your gifting intentions.
Upcoming changes – Pensions to be included in Inheritance Tax from April 2027
A significant change is on the horizon. Starting from 6 April 2027, unused pension funds and certain death benefits will be included within the value of a person’s estate for IHT purposes.
This means that pensions, which were previously outside the scope of IHT, will now be considered part of your estate and potentially subject to a 40 per cent tax charge.
This change could have substantial implications for estate planning.
For example, if you have a defined contribution pension and die after 6 April 2027, the value of your unused pension funds may be added to your estate for IHT calculations.
If your estate exceeds the nil-rate band (currently £325,000), the excess could be taxed at 40 per cent .
Given this development, you should consider strategic gifting and estate planning to mitigate potential tax liabilities.
Gifting is not about losing control of your finances.
Done properly, it’s about directing your legacy on your terms, while also reducing the IHT burden for those you care about most.
Whether you are looking to help children with property deposits, fund grandchildren’s education, or simply reduce the size of your estate, speaking to our experienced Inheritance Tax accountants can give you clarity and confidence to move forward.
Want to explore your options for IHT planning? Contact us today.