Making gifts work: reducing Inheritance Tax during your lifetime

Giving money away while you are alive is one of the simplest ways to reduce a future Inheritance Tax bill - and to see your family benefit while you are still around to enjoy it. The rules are more generous than many people realise, but they reward planning ahead. Here is how the main allowances work.

Some gifts leave your estate immediately, with no seven-year wait attached:

• Annual exemption: you can give away £3,000 each tax year, free of Inheritance Tax. If you did not use last year's, you can carry it forward once, so a couple could move up to £12,000 out of their estate in a single year.
• Small gifts: you can give up to £250 to as many different people as you like each year, as long as they have not benefited from your £3,000 annual exemption.
• Wedding gifts: you can give £5,000 to a child getting married, £2,500 to a grandchild, and £1,000 to anyone else, tax-free.
• Gifts to a spouse or civil partner are generally exempt, and gifts to a UK charity are exempt. From 6 April 2025, the relevant cross-border framework is based on long-term UK residence rather than domicile. Specialist advice is needed where the person making the gift is a long-term UK resident and the receiving spouse or civil partner is not, because the exemption may be restricted; transitional provisions may also be relevant.

This is one of the most valuable and least understood exemptions. If you make regular gifts out of your income - not your capital - and those gifts do not reduce your normal standard of living, they can be immediately outside your estate with no upper limit and no seven-year clock. The classic example is paying regularly into a grandchild's savings or covering school fees from your monthly pension income. The key is that the gifts are habitual, come from income, and leave you enough to live on as before. Good record-keeping is essential, because your executors will need to demonstrate the pattern to HMRC.

Bigger one-off gifts to individuals are usually treated as 'potentially exempt transfers'. If you live for seven years after making the gift, it falls completely outside your estate. If you die within seven years, it may be counted back in - although 'taper relief' can reduce the tax on gifts made between three and seven years before death. Taper relief reduces the tax, not the value of the gift, which is a common point of confusion.

You cannot give something away but carry on benefiting from it. The usual example is giving your home to your children while continuing to live in it rent-free. HMRC treats this as a 'gift with reservation of benefit', and the property stays in your estate. If you want to give away an asset you still use, it needs to be done properly - often that means paying a market rent, or taking advice on the alternatives.

With the nil-rate bands frozen until at least April 2031 and pensions coming into the Inheritance Tax net from April 2027, lifetime gifting is likely to feature more prominently in people's plans. The earlier you start, the more of these annual allowances you use, and the better the chance that larger gifts clear the seven-year period. Gifting also needs to be balanced against your own future needs - it is rarely sensible to give away money you might need for later-life care or income.

We help you map which allowances you can use each year, and balance generosity now against the income and care you may need later.