With alterations to inheritance tax laws set to come into force next year, many are seeking to understand the best ways to gift money to children and grandchildren without triggering tax liabilities. From April 2027, pensions left after death will become subject to tax, leading individuals to reassess their estate planning strategies, including gifting.
Currently, the inheritance tax (IHT) system allows individuals to pass on up to £325,000 tax-free (known as the nil-rate band), which can increase to £500,000 when a primary residence is left to direct descendants. Transfers between spouses or civil partners, or to charities, remain entirely exempt from IHT, with any unused allowances transferable between spouses.
For married couples, this means up to £1 million can be passed on free of tax, combining two nil-rate bands and two residence nil-rate bands, provided the couple is legally married or in a civil partnership. Beyond these thresholds, gifting money can help reduce the taxable estate.
READ MORE: Yeovil Town Draw Late Again Despite Ten Men
Sarah Coles, head of personal finance at AJ Bell, explains: “You can usually give away up to £3,000 each tax year without it being counted towards your estate for inheritance tax purposes. If you don’t use this allowance in one year, you can carry it forward for the following tax year. Additionally, you can gift up to £250 to any number of individuals as long as they haven’t benefited from your £3,000 annual exemption. Separate exemptions apply for certain wedding gifts.”
She outlined the core tax aspects: “Anything left to your spouse or civil partner is generally exempt from inheritance tax. Up to £325,000 can usually be left to others tax-free through the standard nil-rate band, and the residence nil-rate band of £175,000 applies if your main home is left to direct descendants. Together, these allowances enable up to £500,000 of an estate to be passed on without IHT.”
If assets exceed these limits, the standard inheritance tax rate of 40% applies unless other reliefs are available.
Coles also highlighted the rules around larger gifts: “Lump-sum gifts, known as potentially exempt transfers (PETs), can also be made. If you survive for seven years after making the gift, it usually falls outside your estate for IHT. However, if you pass away within seven years, part or all of the gift may be subject to tax.”
Regular gifts made from ‘surplus income’ may also be exempt from inheritance tax if certain conditions are met. These gifts must come from income (not savings), leave you with enough to maintain your standard of living, and follow a consistent pattern. Keeping detailed records is essential.
The popular Martin Lewis podcast recently revisited these gifting rules. When discussing the £3,000 gifting allowance, Lucy Spencer from Evelyn Partners explained its use: “This allowance can be given to one person or split among multiple people. If you didn’t use the allowance in the previous tax year, you can effectively give up to £6,000 in the current year.”
Martin Lewis asked about how to record these gifts for tax purposes. Lucy advised: “It’s best to document all gifts, including the small gift allowance of £250 and the large gift allowance of £3,000, either in writing or a spreadsheet kept alongside your will. This is important because when completing inheritance tax forms, there is a section detailing all gifts made before death.”
As changes to inheritance tax approach, understanding and properly recording the rules around gifting have become even more important for effective estate planning.