With the current news stories and speculation around The Government’s plans to raise income through changes to inheritance tax (IHT) and pensions, we are seeing increased enquiries from our clients about how they can ensure they can pass on their hard-earned money to their family.
As we have discussed previously, unspent private pension pots are due to be brought into IHT, and there may also be changes regarding limits on lifetime gifting to further widen the IHT net.
Changes are coming, and it is important to begin planning now to ensure that you can support your family both whilst you are alive, and in the event of your death.
Gifting money to family is an effective way to reduce your IHT liability and it means that you can support family members whilst you are here and at important times in their lives, such as when they need to buy a house or are getting married.
The good news is that there are a number of allowances and exemptions which make gifting possible without creating an unnecessary tax burden. But there are also pitfalls to be aware of.
Why Think About Gifting?
When we talk about “gifting” in financial planning, we mean giving money or assets to your family or loved ones during your lifetime, rather than leaving everything through your will. These gifts can be anything from small cash presents at birthdays to larger sums to help a child or grandchild buy a home. Done correctly, gifting allows you to support those closest to you while also reducing the eventual tax burden on your estate. Gifting enables you to:
- Reduce inheritance tax (IHT): Gifts made during your lifetime can reduce the value of your estate, and in turn reduce the eventual IHT bill.
- Support your family earlier: A financial gift can often be more useful when your children or grandchildren are setting up their lives, rather than much later.
- Peace of mind: Making gifts as part of a clear plan ensures that wealth is distributed in the way you want, rather than left to chance.
Key Allowances and Rules
Of course, there are rules around what you can give and how much before tax becomes an issue. HMRC provides several allowances that let you pass on money without it being counted as part of your estate for IHT. Understanding these rules can make a big difference and ensure you don’t give more to the taxman than necessary.
Annual Exemption
Each tax year you can give away up to £3,000 free of IHT. If you didn’t use last year’s allowance, you can carry it forward for one year.
Small Gifts
You can give up to £250 per person per tax year to as many people as you like, provided you haven’t already used your £3,000 allowance for them.
Wedding and Civil Partnership Gifts
You can give up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to others, if the gift is made in connection with their marriage or civil partnership.
Gifts from Surplus Income
If you have income left after covering your normal living costs, you can give this away regularly and it will be immediately exempt from IHT. To qualify, the gifts must not reduce your standard of living and it’s important to keep good records.
There is no limit regarding gifting out of income. To qualify the gift should, but not necessarily so, be of a regular nature. The important thing is that it should not affect your standard of living. If you have a large unspent pension you could start withdrawing money and gift to a loved one, for instance.
Larger Gifts and the Seven-Year Rule
Gifts above these allowances are classed as Potentially Exempt Transfers (PETs). If you survive for seven years after making the gift, it falls out of your estate. If you die within that time, the gift may be subject to IHT, though the rate tapers down after three years.
Gifts With Reservation
If you give something away but continue to benefit from it, for example gifting your home but continuing to live there rent-free, HMRC will treat it as still belonging to you for IHT purposes.
Example: Helping a Grandchild onto the Property Ladder
Imagine John, aged 66, who wants to give his granddaughter £50,000 to help with a first home deposit.
- The first £3,000 can be covered by his annual exemption.
- The remaining £47,000 becomes a Potentially Exempt Transfer.
- If John lives for seven years, the whole gift is outside his estate.
- If John were to pass away in year 5, the gift would use part of his IHT allowance and could attract some tax, though taper relief would reduce the charge.
By planning ahead and keeping clear records, John can make the gift confidently while still protecting his own financial position.
What Should You Do Now?
The rules around gifting can seem complicated, but the steps you take don’t have to be. Start small, get clear on what’s possible, and build gifting into your wider financial plan.
- Check your own financial needs first. Make sure you retain enough to live comfortably and cover unexpected costs.
- Use your allowances. Make the most of your £3,000 annual exemption, small gift allowance, and surplus income rules.
- Keep clear records. Note the amounts, dates and purpose of gifts — this can be invaluable for your executors and HMRC.
- Think about timing. The earlier you make larger gifts, the more likely they are to fall outside your estate.
- Seek advice. Every family situation is different. The right approach for you will depend on your assets, income, and long-term goals.
Gifting can be a rewarding way to see your loved ones benefit from your hard work, but the rules are complex. With thoughtful planning, you can pass on money tax-efficiently, avoid unnecessary costs, and support the people who matter most.
If you’d like to discuss the best way to support your family while protecting your own financial security, our advisers are here to help.
