Using Gifting to Offset Inheritance Tax Liability
Inheritance Tax (IHT) remains a significant concern for many families, particularly as thresholds have been frozen and asset values continue to rise. Thoughtful gifting can be one of the most effective and flexible strategies to reduce the value of an estate and, in turn, future IHT liability. This post outlines the key gifting rules, strategic opportunities, and essential considerations when using gifting as part of an estate‑planning strategy.
Why Gifting Matters in Inheritance Tax Planning
Gifting reduces the size of your estate, helping to bring your estate value below thresholds such as:
The £325,000 standard nil‑rate band, frozen until 2030.
The £175,000 residence nil‑rate band, where applicable when passing a main home to direct descendants
Together, married couples can potentially pass on up to £1 million tax‑free through combined nil‑rate bands and transferable allowances. Meaning that IHT is only due on anything above £1 million.
Understanding What Counts as a Gift
According to HMRC, a gift can include money, valuables, property, land, investments, or even assets sold for less than market value (the value difference counts as a gift). Most gifts fall into one of two categories:
Exempt gifts – immediately outside the estate.
Potentially Exempt Transfers (PETs) – gifts that become exempt if you survive seven years.
Knowing how each type works is essential when structuring a tax‑efficient gifting plan.
Key Gifting Exemptions You Can Use Right Now
Annual Exemption – £3,000 per Tax Year
You can give away up to £3,000 each tax year, and this amount is immediately exempt from your estate. You may also carry forward one unused year, allowing up to £6,000 in a single year if the previous year’s exemption wasn’t used.
Small Gifts – £250 per Recipient
You may gift up to £250 to as many individuals as you like each year, provided they have not received part of your annual exemption.
Gifts on Marriage or Civil Partnership
These exemptions apply when made on or shortly before the event: £5,000 to a child; £2,500 to a grandchild; and £1,000 to anyone else.
Gifts between spouses or civil partners are typically unlimited and exempt, as long as both partners live permanently in the UK, as well as regular gifts from any surplus income - provided these gifts do not reduce your standard of living and you keep good records.
The Seven‑Year Rule
Most larger gifts will fall under the Potentially Exempt Transfer (PET) rules. These gifts become fully exempt if the donor survives for seven years after making them.
Survive 7 years → No IHT on the gift
Die within 0–3 years → Gift taxed at full 40%
Die within 3–7 years → Taper relief applies, reducing tax (32%, 24%, 16%, 8% depending on survival time)
The rule exists to prevent last‑minute ‘deathbed gifting’, and is central to long‑term tax‑efficient planning. Many families can significantly reduce exposure by gifting earlier rather than later.
The Gift With Reservation Trap
A common pitfall arises when someone gifts an asset (often a property) while continuing to benefit from it. If, for example, you gift your home to your children but continue to live in it rent‑free, HMRC may treat the asset as remaining in your estate. This is known as a Gift With Reservation of Benefit (GWR) and negates the tax advantages To avoid this, the donor must genuinely give up all benefit, or pay a full market rent if continuing to use the property.
Record‑Keeping: An Essential Part of IHT Planning
Executors must report gifts made within the previous seven years during probate, by examining bank statements and financial records. Poor record‑keeping can result in gifts being treated unfavorably for IHT purposes and may delay estate administration. If you are gifting with the view of reducing IHT liability, it is worth maintaining a gift register which contains:
Date of gift
Amount or asset value
Recipient
Relevant exemption used
Evidence of surplus income (if applicable)
Why Gifting Should Be Part of Your Holistic Estate Plan
Gifting is not only about reducing tax, it's about transferring wealth with intention. Whether helping children enter the property market, supporting grandchildren’s education, or simply sharing your success while you’re able to see the benefit, gifting can be a powerful tool.
When combined with other planning strategies such as trusts, life insurance in trust, and will‑based planning - gifting can form an important pillar of a comprehensive estate plan.
If you’d like tailored advice on using gifting to reduce your inheritance tax liability, our team is here to help.
This article is for general information and does not constitute personal financial advice. If you’re unsure what’s best for you, seek independent financial advice.