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3 essential factors to consider if you plan to gift wealth to avoid Inheritance Tax

March 28, 2025

Category: Financial Planning

Figures suggest more families are gifting to avoid Inheritance Tax (IHT). While passing on assets to loved ones may seem like a clear solution, it isn’t always so simple.

More estates are becoming liable for IHT as thresholds for paying the tax are frozen. The Office for Budget Responsibility predicts HMRC will collect £8.4 billion from IHT receipts in 2027/28, compared to £7 billion in 2022/23.

The portion of your estate that exceeds IHT thresholds could be taxed at a standard rate of 40%. So, it’s not surprising that families are looking for ways to mitigate a potential bill.

According to a Telegraph report, the number of people who have gifted assets that would become exempt from IHT if they survived a further seven years increased by 48% between 2009/10 and 2019/20.

If the value of your estate exceeds the nil-rate band, which is £325,000 in 2023/24, your estate may be liable for IHT. You might also be able to use the residence nil-rate band, which is £175,000 in 2023/24, if you leave your main home to direct descendants.

You can pass on unused allowances to your spouse or civil partner.

Both the nil-rate band and residence nil-rate band are frozen until April 2028. So, if the value of your estate is nearing the threshold, you may find your estate could become liable for IHT as the value of your assets could rise.

Gifting assets to your beneficiaries now can be advantageous. It may allow you to help loved ones reach life milestones.

However, if you’re gifting for IHT purposes, there are some things you may want to keep in mind.

  1. Gifting may affect your financial security later in life

Before you hand over a gift, assessing the effect it could have on your later life may provide peace of mind. Could gifting leave you financially vulnerable in your later years? Could it affect your ability to overcome a financial shock?

Making gifts part of your wider financial plan means you can understand how your decision may affect your wealth over the short and long term.

Understanding the potential implications before you make a gift might help you to feel more confident about your finances.

  1. Not all gifts are considered immediately outside of your estate for Inheritance Tax purposes

When you’re gifting to minimise an IHT bill, considering longevity may be important.

Gifts might be considered “potentially exempt transfers” (PETs) and included as part of your estate when calculating IHT for up to seven years after they were given.

As a result, if the entire value of your estate exceeds IHT thresholds, your estate could be liable for IHT on assets you’ve already passed on.

Once seven years have passed, gifts will not be included when calculating IHT liability.

  1. There are gifting allowances you may want to make use of

If you want to gift assets to reduce an IHT bill, there are some allowances you could make use of.

These gifts would be considered immediately outside of your estate for IHT purposes:

  • The annual exemption, which is £3,000 in 2023/24
  • £1,000 to someone getting married, rising to £5,000 for your children and £2,500 for grandchildren
  • Unlimited gifts of up to £250 to any individual who has not received a gift using another allowance.

Regular gifts that are made from your income may also be exempt from IHT. These gifts must be made regularly. For instance, you may pay the rent on your child’s home or your grandchild’s school fees.

Making use of these allowances and exemptions could provide a tax-efficient way to pass on wealth during your lifetime.

There are others steps you could take to reduce a potential Inheritance Tax bill

Gifting isn’t the only option if you want to reduce a potential IHT bill. Other solutions might include:

  • Leaving 10% or more of your estate to charity, which would reduce the IHT rate from 40% to 36%
  • Passing on wealth through your pension, which is usually considered outside of your estate
  • Using a trust to pass on assets tax-efficiently.

It’s important to weigh up the pros and cons of these options. It may also be useful to take both financial and legal advice in some cases, as estate planning can be complex.

You might also want to consider taking out a whole of life insurance policy. This wouldn’t reduce the amount of IHT your estate is liable for, but loved ones could use the money it pays out to settle the bill.

It’s essential that life insurance is written in trust. Otherwise, the payout could be considered part of your estate and result in a higher IHT bill.

An estate plan can help you set your affairs in order and minimise Inheritance Tax

An estate plan can help you set out what you’d like to happen in your later years and how you’d like to pass on assets when you die. Setting your affairs in order can be emotional, but it’s an important task.

We can help you create an estate plan that reflects your wishes and considers concerns you may have, such as whether IHT will affect the assets you leave behind. Please contact us to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate or tax planning.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

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