Giving money away during your life is the simplest way to reduce inheritance tax. It is also where most of the mistakes happen, because the rules are strict and the dates matter.
Gifts that are exempt straight away
| Gift | Allowance |
|---|---|
| Annual exemption | £3,000 each tax year. One year's unused amount can carry forward. A spouse or civil partner has their own |
| Small gifts | £250 to any one person, but not alongside another exemption for the same person |
| Wedding gifts | £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else |
| Regular gifts from income | No limit, if they come from surplus income and leave you able to maintain your normal standard of living |
Gifts to a spouse or civil partner, and to charities, are also exempt. Keep records of what you give and why, especially for the gifts out of income. Your executors may have to prove them.
The seven-year rule
A larger gift to another person is a potentially exempt transfer. If you live for seven years after making it, it is free of inheritance tax. If you die within seven years, it counts in your estate and uses up your nil-rate band first.
Taper relief applies only if the gifts made in the seven years before your death add up to more than the £325,000 nil-rate band. If they do, the tax on those gifts falls on a sliding scale after three years.
| Time between gift and death | Tax on the gift |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more | 0% |
Taper relief reduces the tax on the gift, not its value. And gifts into most trusts follow different rules, so the seven-year rule isn't automatic for them.
Giving away your home
The trap people fall into is giving a house to their children and carrying on living in it. HMRC treats that as a gift with reservation of benefit. The house stays in your estate for inheritance tax, even if you live for more than seven years afterwards.
Paying the new owners a full market rent can change the position. That needs advice before you transfer anything.
The care fees catch
The seven-year rule is a tax rule. It has no bearing on care fees. Scottish councils can treat assets you gave away to avoid care costs as still yours, with no time limit, if avoiding the charge was a significant reason. Gifts that are fine for inheritance tax can still count against you.
Our guide to giving away assets to avoid care fees explains the test. Read it before making a large gift, especially if care is likely in the next few years.
Putting it together
The sensible order is to use the exemptions first, then consider larger gifts, keeping enough to live on and to pay for care. A gift you can't afford is not a good gift, and the allowances in our guide to inheritance tax thresholds may mean you owe nothing in the first place.
Pensions are changing too. From April 2027, unused pension funds count towards your estate, which makes regular gifts from surplus income more relevant.
Richard arranges gifting plans with your accountant and our specialist legal partners. See our Inheritance Tax page.