This blog, “Gifting and Inheritance Tax: What You Need to Know for Estate Planning” looks in depth at the implications of Inheritance Tax on your estate and gifting to your loved ones as a way to share your wealth.
Planning what happens to your assets after you pass away can feel like a daunting task—but making financial gifts during your lifetime can be a smart and effective way to reduce the impact of Inheritance Tax (IHT). However, there are rules and thresholds to understand so that your good intentions don’t lead to unexpected tax bills for your loved ones.
In this blog, we’ll take a look at the Inheritance Tax rates, thresholds, provide two examples that show you two different scenarios.
What Is Inheritance Tax?
Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. In the UK, not everyone pays it—only estates that exceed a certain threshold are taxed.
Current IHT thresholds (as of 2025)
- Nil Rate Band (NRB): £325,000 — the standard amount you can leave without paying any tax.
- Residence Nil Rate Band (RNRB): Up to £175,000 extra if you leave your main home to your direct descendants (children or grandchildren).
That means you could pass on up to £500,000 tax-free—or £1 million for a married couple or civil partners (each partner has their own allowance and any unused amount can be transferred to the surviving partner).
Anything over the threshold is taxed at 40%.
Gifting and Inheritance Tax
One popular strategy for estate planning is to give away some of your assets while you’re still alive. This is known as lifetime gifting. If done right, it can reduce the value of your estate and the tax bill your family might face. Here’s how it works:
Gifts That Are Immediately Tax-Free
- Annual exemption: You can give away up to £3,000 per year without it being added to your estate for IHT. If unused, this can be carried forward one year (so potentially £6,000).
- Small gifts: You can gift up to £250 per person per year to as many people as you like, provided they haven’t received another exemption from you.
- Wedding gifts:
- Up to £5,000 to a child
- Up to £2,500 to a grandchild or great-grandchild
- Up to £1,000 to anyone else
- Regular gifts from surplus income: If you regularly give money out of your after-tax income and it doesn’t affect your standard of living, these gifts can be completely exempt from IHT.
Potentially Exempt Transfers (PETs)
Any larger gifts—like giving someone a house, large cash sum, or valuable asset—are known as potentially exempt transfers.
- If you live for 7 years after making the gift, it becomes fully exempt from IHT.
- If you die within 7 years, the gift may still be taxed—but the amount of tax owed may be reduced depending on when the gift was made (this is called taper relief).
Taper Relief Rates
Years between gift and death | IHT rate on the gift |
0–3 years | 40% |
3–4 years | 32% |
4–5 years | 24% |
5–6 years | 16% |
6–7 years | 8% |
7+ years | 0% |
Example 1 – Estate Above the IHT Threshold
Let’s say Margaret is 70 and has an estate worth £900,000. She wants to reduce the inheritance tax her children might pay.
- She gives her daughter £300,000 in cash.
- She uses her £3,000 annual exemption (so only £297,000 counts as a PET).
- Margaret lives for 6 years after making the gift.
What happens?
- The £297,000 is still part of her estate if she dies within 7 years—but because she lived more than 5 years, taper relief applies.
- Instead of being taxed at 40%, it’s taxed at 8%.
- Tax due: £297,000 × 8% = £23,760.
Even though some tax is due, the gift has significantly reduced the value of her estate and ultimately lowers the total IHT bill for her family.
Example 2 – Estate Below the IHT Threshold
Now let’s look at David, a widower with two children. His estate is worth £480,000, including his home (valued at £300,000), savings, and investments.
David’s wife passed away a few years ago and left her entire estate to him, so David inherited her full IHT allowance.
What are David’s available allowances?
- His own Nil Rate Band = £325,000
- His own Residence Nil Rate Band = £175,000
- Plus, he can use his late wife’s unused allowances = another £500,000
Total tax-free threshold: £1 million
Since David’s estate is well below £1 million, there will be no IHT to pay, even if he doesn’t make any gifts.
But what if David still wants to gift?
David gives each of his children £25,000 to help with house deposits.
- These gifts are classified as Potentially Exempt Transfers (PETs).
- Even if David dies within 7 years, no tax will be due because the total estate (including the gifts) is still below the £1 million threshold.
Gifting, in this case, isn’t about avoiding tax—it’s about supporting his family sooner and giving with impact during his lifetime.
Key Things to Remember
- Plan early: The 7-year rule means the sooner you gift, the better.
- Understand your allowances: Many estates fall below the IHT threshold, especially for couples.
- Keep clear records: Track what you give, when, and to whom.
- Don’t overstretch yourself: Your financial wellbeing comes first.
- Seek advice: A financial adviser or estate planner can tailor guidance to your situation.
And Finally…
Whether your estate is over the IHT threshold or comfortably under it, gifting can be a meaningful part of your estate planning. It allows you to reduce the tax burden, but more importantly, to support your loved ones while you’re still around to see the difference it makes.
If you’re considering gifting or estate planning, it’s always wise to get professional advice to ensure your plans are both tax-efficient and aligned with your long-term goals.
