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Written by Emily Cross.
25 minute read
Inheritance tax (IHT) on gifts is the tax that may become payable on money, property or other assets you give away during your lifetime, depending on how much you give, who you give it to and how long you live afterwards. The UK system provides several tax-free gifting allowances, while many other lifetime gifts can fall outside your estate for inheritance tax purposes if you live for seven years after making them.
The rules can feel complicated, particularly when you’re already thinking about how best to provide for the people you care about. Understanding the basics can make conversations about your estate and future wishes a little easier and help you know when professional advice may be needed.
This guide explains the UK inheritance tax rules on gifts, including annual allowances and exemptions, the seven-year rule, taper relief, gifts to family members and the potential tax implications of different types of gifts. It also looks at some of the risks and common considerations when using gifting as part of estate planning.
This is general information rather than tax or legal advice. Everyone’s circumstances are different, so if you’re considering making significant gifts or reducing a potential inheritance tax liability, speak to a qualified tax, financial or legal adviser about your individual situation.
Key takeaways:
Inheritance tax (IHT) is the money you will have to pay HMRC on certain assets, items, and amounts of money that you pass to a loved one or relative upon death. While it may seem unfair that you have to pay any form of tax on things you have already bought with money that you have paid tax on, inheritance tax is a longstanding part of the UK tax system and one we are all obligated to comply with.
The focus of our guide is on gifts — valuable items and amounts of money that are given to a relative or friend with nothing expected in return. A purchase is when an asset changes hands in exchange for money, a gift is when nothing is received in return. There are a series of complex rules that govern whether or not, and how much, inheritance should be levied on gifts in the UK.
The first thing you may want to consider is whether to make a gift during your lifetime or wait for it to be transferred after you die. One thing to consider is that if you give a gift while you are still alive and you live for more than 7 years after the date you give it, you are unlikely to have to pay any inheritance tax. Speaking to a tax planning professional will help you understand your inheritance tax liability in your specific case.
It may also be useful to know that you have an annual exemption of £3,000 that allows you to gift a loved one this amount each year tax-free. Alternatively, you also have the option of splitting the total amount between two or more individuals.
Taking a closer look at the 7-year rule for inheritance tax may help you to understand your options and allow you to find conversations with tax professionals more accessible.
The 7-year rule means that most lifetime gifts become fully exempt from inheritance tax if you live for seven years after making them. Gifts made within seven years of death may count towards inheritance tax, depending on their value and any exemptions that apply.
Importantly, the £325,000 nil-rate band also applies. If the total value of relevant gifts made in the seven years before death is within the available nil-rate band, there is generally no inheritance tax to pay on those gifts. Gifts are usually counted in chronological order, with earlier gifts using the nil-rate band first.
If relevant gifts exceed the available nil-rate band, inheritance tax may become due on the excess. This is also where taper relief can become relevant, reducing the tax payable on qualifying gifts made more than three years before death.
If you survive for seven years after making a gift, it will generally fall outside your estate for inheritance tax purposes.
If you give gifts that total more than £325,000 while you are still alive, taper relief will determine how much the recipient of the gifts has to pay in inheritance tax when you die:
Taper relief is put into practice to ensure that there is not a sudden, unexpected jump in tax exposure when a loved one lives just a few days less than 7 years. The idea is to have a sliding scale in place that reflects the amount of time they continued to live after giving the gift.
You can make certain gifts during your lifetime without them being added to your estate for inheritance tax purposes. The amount you can give tax-free depends on the type of gift and who receives it.
You can give away a total of £3,000 each tax year using your annual exemption. This can go to one person or be divided between several people.
A common misconception is that you can give £3,000 to each recipient. The allowance is £3,000 in total, regardless of how many people receive gifts.
If you don’t use the full allowance, you can carry the unused amount into the following tax year, but only for one year. This means you could potentially give up to £6,000 using the annual exemption if you didn’t use any of it the previous year.
There are several other exemptions that can be used alongside the annual allowance in certain circumstances.
Small gifts: You can give as many people as you like gifts worth up to £250 each per tax year, provided you haven’t used another allowance for the same person.
Wedding and civil partnership gifts: You can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else tax-free when they’re getting married or entering a civil partnership. This exemption can be combined with the £3,000 annual exemption, meaning a parent could give a child up to £8,000 using both allowances.
Gifts to spouses and civil partners: Gifts between spouses and civil partners are generally exempt from inheritance tax. However, different rules can apply where one partner is not a long-term UK resident. Since April 2025, the rules are based on long-term UK residence rather than domicile, so professional advice can be particularly useful for couples with international circumstances.
Gifts to charities and political parties: Gifts to qualifying charities and political parties can be exempt from inheritance tax. Leaving at least 10% of your net estate to charity can also reduce the inheritance tax rate on the taxable part of your estate from 40% to 36%.
Help with living costs: Regular payments made from your income can also be exempt, provided you can afford them after meeting your normal living costs. This might include helping with a child’s rent, paying into a savings account for a child under 18 or financially supporting an elderly relative. There is no fixed limit provided the conditions for the exemption are met.
Because several exemptions can sometimes be used together, keeping clear records of what you give, when and to whom can make it much easier to establish the inheritance tax position later.
The ‘normal expenditure out of income‘ exemption allows you to make regular gifts from your income with no set limit and no seven-year wait.
To qualify, gifts must:
Examples might include regular contributions towards school fees, a relative’s mortgage or a child’s savings.
Keep clear records of your income, expenditure and gifts, as your executors may need to demonstrate to HMRC that the exemption applies, including through form IHT403.
Unlike the £3,000 annual exemption, there’s no fixed cap, making this potentially valuable for people with significant surplus income.
Things can quickly get complicated in the world of inheritance tax, with PETs sometimes causing confusion.
A Potentially Exempt Transfer (PET) is a lifetime transfer of something of value (money, property, shares, etc.) that satisfies a couple of key conditions:
While this is something that a tax planner will talk you through, you may be pleased to know that all PETs become 100% exempt from inheritance tax if you live for more than 7 years after making the gift.
A PET becomes a chargeable transfer (something on which inheritance tax will be levied) if the person who made the gift dies within 7 years of making it. In cases like these, taper relief rates will reduce the amount of inheritance tax that is to be paid if the giver of the gift died within 3-7 years of giving it.
Using a tax professional to help with how to set up a trust can reduce your tax exposure by effectively reducing the size of your estate at the time you do. A key part of calculating the total exposure to inheritance tax is to decide what is a CLT and what is not, and this is something the tax professional can help you with. CLTs will immediately become due for inheritance tax because of the nature of the value they hold. Although this may sound overly complicated right now, the main point is to be aware of the fact that a trust reduces your tax exposure rather than setting it to zero.
Starting to redistribute your estate before you die is where gifting comes in, and it is something your tax professional may well advise.
You can gift your children and grandchildren money from your estate, but if you die within 7 years of doing so, a sliding scale of inheritance tax rates will be applied. Some families may choose to use their £3,000 annual exemption or to structure gifts so that they come from surplus income.
HMRC classifies things such as monthly deposits into a savings account as surplus income, and allows you to gift it tax-free to your children or grandchildren.
You may also find that it is helpful to consider gifting property and other tangible assets. While you can gift your spouse or civil partner everything without having to pay inheritance tax or capital gains tax, the same is not true if you are gifting property to anyone else.
Although an exhaustive list of scenarios is beyond the scope of this guide, here are some common situations that may help shine a light on how the system works:
Hopefully, these examples provide an insight into how complex the system can be, but also that you can quickly home in on the ideal approach with the help of a tax professional.
The importance of writing a will lies in the fact that it allows your family to know what your wishes are when you die. Our guide on what probate involves can help you feel comfortable with the basics so that you don’t have to look in multiple places for the information you want.
If you have a Lasting Power of Attorney (LPA), your attorneys have limited powers to make gifts on your behalf. This helps protect your estate and means significant gifting for inheritance tax purposes generally requires approval from the Court of Protection.
Under a Property and Financial Affairs LPA, attorneys can usually make reasonable gifts on customary occasions, such as birthdays, weddings or Christmas, and donations to charities you previously supported.
However, they generally cannot make substantial gifts, give away major assets such as your home, or use your money for inheritance tax planning without court approval.
For larger gifts, an application can be made to the Court of Protection, which will consider factors including your best interests, your likely wishes and whether sufficient assets remain to meet your future needs.
Alongside legal paperwork and financial planning, arranging a funeral in advance is a practical way to protect your family and secure peace of mind. Options like prepaid funeral plans can ease emotional and financial pressures when the time comes, helping families focus on what matters most. If you’re beginning to think about a funeral for yourself or someone close to you, Aura is here to help. We offer simple, transparent options with genuine care and compassionate support.
Our funeral plans provide peace of mind for those planning ahead, with no hidden costs and funds held securely in an independent trust until they are needed.
For families who need immediate support, we also provide direct cremation services for those who have passed or are expected to pass away soon.
It is natural to want to pass more of your estate to loved ones, but any gifting strategy should remain fully compliant with inheritance tax rules. Making use of allowances such as the annual exemption and, where appropriate, regular gifts from surplus income can help reduce an estate’s potential IHT liability.
It’s also important to distinguish inheritance tax planning from deliberate deprivation of assets. If a local authority believes you deliberately gave away money or property to reduce what you would pay towards care, it may still take those assets into account when assessing your finances. There is no simple seven-year cut-off for care-fee assessments.
From 6 April 2027, most unused pension funds and death benefits are due to be brought within the scope of inheritance tax. This means people with significant pension savings may want to review their estate planning before the new rules take effect.
Depending on your circumstances, this could include drawing pension income and making qualifying gifts from normal income, or making greater use of existing IHT exemptions and allowances. Pension and inheritance tax planning can be complex, so it’s worth taking regulated financial or tax advice before making changes.
For most gifts made within seven years of death, inheritance tax is dealt with as part of administering the estate. However, if gifts within that period exceed the £325,000 nil-rate band, the recipients of those gifts may become personally liable for IHT on the amount above the threshold.
The executor is responsible for calculating the estate’s inheritance tax liability and arranging payment to HMRC. Where taxable lifetime gifts exceed the available nil-rate band, HMRC may instead require the person who received the gift to pay the tax due on it.
Inheritance tax is generally due six months after the end of the month in which the person died. Interest may be charged if payment is late.
This can become more complicated where several gifts have been made, exemptions apply or the person dies without a will, so professional tax advice can help establish who is responsible and how much is due.
You may decide that you wish to give a gift to a friend or loved one to protect your estate from inheritance tax. Not only will this help with any settling of affairs that you may wish to have in order during your lifetime, but it can also play a role in reducing the stress and upset that your surviving loved ones may experience when you die.
The most common way to find someone who can help you with your inheritance tax liability on gifts is to speak with an independent financial advisor in your local area. Doing so can provide the following benefits:
An independent financial advisor can help reduce the stress on you and your loved ones at a challenging time. There are also other steps you may consider taking.
Planning for and then dealing with the loss of a loved one can be one of the most challenging and emotionally testing things you can do, and we completely understand the journey you may be on right now.
When you are trying to process the loss of a loved one, dealing with the tax system may naturally feel overwhelming. In our experience, many families find that breaking things down step by step and referring to our inheritance tax guide when they feel ready can help.
If you are someone who finds that talking things through and staying busy can help you process grief, you may want to look into other areas where money from the estate may be needed. Looking at typical funeral plan costs is a way of starting to calculate the overall outgoings from your relative’s estate.
Some find that even a small initial search can help them start to process their loss and can go a long way towards ensuring they can plan a service they feel is right. However, other members of the family may want to move at a different speed, in which case you may find it helpful to refer to our advice on solving funeral arrangement disagreements.
While a tax professional can guide you through the legal and financial side of things, and it can feel like there are endless demands on the finances of the estate, there is an area where we can help. At Aura, our expertise lies in helping you make a decision that feels right for you when it comes to how you will remember your loved one. We have guides that can help you compare funeral plans and direct cremation providers so that you feel supported when making one of the most emotional decisions you may be faced with at this time.
If you’re beginning to think about a funeral plan, or need to make arrangements now, having a clear idea of what’s possible can make a difficult time feel a little easier. At Aura, we keep things simple and transparent, so you know what to expect.
You can request a free, no-obligation quote for one of our funeral plans if you’re planning ahead, or for our immediate direct cremation services if a loved one has already passed away or is expected to soon. Our team is here to help over the phone or through email.
With Aura, there’s never any pressure. We’ll give you clear, straightforward guidance without endless phone calls or expectations to commit. Just the information you need to decide whether we’re the right choice for you and your family.
We know that talking about money and assets can feel stressful at the best of times, especially when you add in the fact that a loved one may be approaching the end of their life. While these conversations are seldom easy, having them early may allow you all to find a sense of balance in life and can help mitigate some of the stress and upset that understandably occurs when a loved one dies.
We hope you have found answers to your queries and perhaps even some words of support. If you would like to explore the complex world of inheritance tax on gifts further, you may find it helpful to speak with a tax planning professional who can give you personalised assistance. We can also recommend services such as Cruse Bereavement Support that you may find helpful if you are facing difficulty in your grief, and feel you want to open up to someone outside of your family and friends.
Giving a gift is something that many tax planning professionals will recommend as a way of minimising your tax exposure. Because of the complex nature of the tax system, there is no definitive answer to the exact amount of tax you will pay because every situation has a variety of complicating factors. A good case in point is the fact that you can end up being taxed after you die, even though you gave the gift when you were still alive.
Taper relief means that the amount of inheritance tax you are charged on the aforementioned gift may be less than 40%, but a tax planning professional will need to be consulted for the final value to be determined. They will also be able to tell you how things such as business relief can help you to pass an asset to someone else without having to pay inheritance tax.
You can give away £3,000 each tax year under the annual exemption, with any unused allowance carried forward for one tax year. This is a total allowance, not £3,000 per person.
Other exemptions may apply too, including small gifts of up to £250 per person, wedding or civil partnership gifts of £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else, and qualifying regular gifts from your normal income.
If you live longer than 7 years after giving a friend or loved one a gift, and the gift is not part of a trust set up to minimise your tax exposure, you will not have to pay any inheritance tax. This is known as the 7-year tax rule, and it is in effect regardless of how big the gift is, who you have given it to, and the nature of the gift itself.
Because trusts complicate matters, you may find it helpful to speak to your tax planner to understand how the 7-year rule comes into play. They will be able to guide you through your options and can help you to structure your affairs in a way that minimises tax exposure while maximising what your loved ones will inherit. Many families find that having these conversations in good time can help reduce the stress when a loved one dies.
Leaving everything to your spouse or civil partner will ensure that you are 100% exempt from inheritance tax, regardless of how large or complex your estate is. The same is true if you decide to leave all of your estate to one or more charitable organisations.
Something you may wish to consider is using charitable giving to cap the amount of inheritance tax you will pay on the remainder of your estate. A common way to do this is to give 10% of your estate to a charity, which in many cases will then cap the amount of inheritance tax that you pay on the rest of your estate at 36%. That said, because of the complex nature of the UK tax system, there are exceptions to this general rule that a professional tax planner may need to make you aware of.
Generally speaking, HMRC’s guidance is that you will not have to pay inheritance tax if your estate is worth less than £325,000. The same is very likely to be true if you leave an estate that is larger than this amount to a charity or your married partner. There are also instances where leaving your estate to a local community amateur sports club can grant you the same form of exemption.
Others choose to legally minimise their inheritance tax liability by actively reducing the size of their estate. Making gifts in the form of money and assets from your estate to friends and loved ones will help you reduce the value of your estate while you are still alive. Provided this is done in the right way with help from a professional tax planner, it can help you gradually pass your estate to your relatives in a way that is tax-free.
Another approach is to place some or all of your estate in a trust where one party administers the trust and a second party benefits from it. These types of arrangements, while perfectly legal and compliant with UK tax regulations, are highly complex, and you may find that the best course of action is to consult a tax professional you trust.
If you die within 7 years of giving a gift to a friend or loved one, you may find that inheritance tax becomes due on the gift. The precise amount of tax — you may not even have any tax liability — will depend on the size and nature of the gift, when you gave it within the 7-year window, and who you gave it to. For example, gifts given via trusts will still be liable for inheritance tax.
Giving cash gifts to family members is a common way to strategically reduce the value of an estate. There is a tax-free annual exemption of £3,000 that can be gifted to one member of your family. Alternatively, you may choose to split the £3,000 annual exemption between two or more relatives. Making use of your annual exemption each year can help you take a strategic approach to minimising the tax liability of your overall estate.
A trust is a complex financial instrument that needs to be set up by a tax professional, but understanding the basic principle of how they work may help you feel more comfortable with the options you have at your disposal.
The trust can help to protect your estate from inheritance tax by creating a divide between who legally owns the estate and who benefits from the value of the estate. The trustee is the person who legally owns and runs the estate, while the beneficiary is the person or persons who benefit financially from the way the estate performs over time.
Reporting taxable gifts to HMRC is a legal requirement and an obligation that a tax planning professional will help ensure you always meet. If you fail to report a taxable gift, you will be forced to pay anywhere from 50-100% of the undeclared tax. Something to have in mind here is that the person who receives the gift will be the one who is liable for the penalty. This means that incomplete tax structuring and inheritance planning may result in unwittingly increasing the stress and financial burden of a loved one.