At AWR Accountants, we often help high-net-worth clients reduce their Inheritance Tax (IHT) bills through strategic estate planning and use of exemptions. One popular method is gifting assets before death. However, this area of tax can be tricky, so it’s important to understand the rules before making any decisions.
Gifting Assets and the 7-Year Rule
If you give away assets during your lifetime and live for seven years after the gift, the value of that gift is usually exempt from IHT. But if you pass away within seven years, the gift may still be taxed, depending on its value and type.
Some gifts can trigger an IHT charge at the time they’re made, especially if they’re chargeable lifetime transfers (not covered by exemptions). However, potentially exempt transfers (PETs) can become tax-free if you survive for seven years.
If you live at least three years after the gift, a reduced rate of IHT might apply.
Use Inheritance Tax Exemptions to Your Advantage
Even though giving assets away and surviving seven years can help, IHT exemptions offer more immediate benefits. These exemptions can apply to both PETs and chargeable gifts.
1. Annual Exemption
Each person can gift up to £3,000 per year without it counting towards their estate for IHT purposes. If you didn’t use this exemption last year, you can carry it forward for one year – but you must use the current year’s allowance first.
Example:
In 2024–25, Gordon gives his son £500. In 2025–26, he gives him £4,000. The first £3,000 is covered by that year’s annual exemption. The remaining £1,000 is covered by the unused £2,500 from 2024–25.
2. Small Gifts Exemption
You can gift up to £250 per person per year to as many people as you like, tax-free – as long as they don’t receive other exempt gifts from you that year.
Example:
Claire uses her annual exemption, then gives £250 each to 30 friends. Later, she gives £10 more to her caddy. The caddy’s total gift (£260) exceeds the £250 limit, so none of it qualifies as a small gift.
3. Gifts on Marriage or Civil Partnership
You can make tax-free gifts when someone gets married:
- £5,000 if you’re their parent
- £2,500 if you’re a grandparent or part of the couple
- £1,000 for anyone else
Example:
David receives £5,000 from his dad, £3,000 from his grandmother, and £1,000 from a friend. £5,000 and £1,000 are fully exempt; £2,500 of the £3,000 from his grandmother is exempt too.
4. Spousal Gifts
Unlimited gifts between spouses or civil partners are IHT-free if both are UK-domiciled. If one partner is not domiciled in the UK, limits may apply.
5. Agricultural and Business Property Relief
You might qualify for Agricultural Property Relief (APR) or Business Property Relief (BPR) on certain types of assets, reducing their value for IHT. Speak to AWR Accountants to check eligibility.
Gifts Out of Income – A Powerful IHT Exemption
Perhaps the most powerful (and often overlooked) IHT exemption is for gifts made from surplus income. There’s no financial cap, but three key rules must be met:
- The gift must be part of normal spending – Regular payments are best.
- The gift must come from income, not savings or capital.
- Your lifestyle must stay the same – You can’t dip into savings to maintain your standard of living.
Example 1:
Sebastian gives each of his three children £200 per month. Switching to gifting his grandchildren instead probably won’t affect the exemption – as long as he keeps the pattern going.
Example 2:
Gertrude pays her granddaughter’s school fees and gifts 40% of her savings income to her grandson. The amounts vary, but the gifts still count as regular and from income.
Example 3:
Evelyn’s extra income varies from £10,000 to £15,000 yearly. She can gift up to £12,500 annually, even if she dips below that in some years, provided the average holds up and her lifestyle doesn’t suffer.
It’s important to keep detailed records of your income and regular spending. If HMRC ever questions the exemption, paperwork helps.
Final Thoughts from AWR Accountants
Reducing Inheritance Tax with smart gifting strategies can protect wealth for future generations. By using exemptions like the annual gift allowance, marriage gifts, and especially gifts from income, high-net-worth individuals can make a big difference to the tax bill their loved ones may face.
But remember: tax planning should never compromise your financial comfort. Always plan ahead, and speak to professional tax advisors to find the most efficient and compliant route.
Read the Other articles in this series:
Inheritance Tax Essential for 205/26
Speak to AWR Accountants, trusted tax advisors in Derby, who specialise in high-net-worth estate planning and IHT advice.
About the author
Waheed Rehman is a Partner at AWR Accountants specialise in advising high net worth individuals on a range of tax matters.