With alterations to inheritance tax rules coming into effect next April, many are keen to understand how to gift money to children and grandchildren without incurring inheritance tax. A tax expert has outlined important allowances that can help minimise tax liabilities.
From April 2027, pensions remaining after death will become subject to tax, prompting individuals to reassess their inheritance tax exposure and explore gifting strategies to protect their estate.
Currently, individuals can leave up to £325,000 tax-free (known as the nil-rate band), increasing to £500,000 if a primary residence is left to direct descendants. Unlimited transfers can be made between spouses or civil partners without inheritance tax (IHT), with unused allowances transferable, allowing a married couple to pass on up to £1 million tax-free.
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Gifting can further reduce inheritance tax exposure. Sarah Coles, Head of Personal Finance at AJ Bell, explained: “You can usually give away up to £3,000 each tax year without it counting towards your estate for inheritance tax purposes. This allowance can be carried forward for one tax year if unused.”
Additionally, gifts up to £250 can be given to any number of people, provided the recipients have not benefited from the £3,000 annual exemption. Separate exemptions apply for certain gifts on weddings.
Ms Coles highlighted that gifts to a spouse or civil partner remain exempt from inheritance tax, applying to married couples and civil partners, and assets passed between them.
Beyond these thresholds, the standard inheritance tax rate is 40%, though some reliefs may apply.
Larger gifts, termed potentially exempt transfers (PETs), are also possible. If the donor survives seven years after making a gift, it is excluded from the taxable estate. Should death occur within seven years, some or all of the gift may be subject to inheritance tax.
Regular gifts from surplus income can also be exempt, if they meet HMRC’s rules: the gifts must come from income (not savings), leave the donor with sufficient income to maintain their usual lifestyle, and form part of a consistent pattern. Keeping detailed records is crucial.
These allowances and strategies were recently discussed on the Martin Lewis podcast, where expert Lucie Spencer from Evelyn Partners clarified the £3,000 gift allowance, noting that it can be given to one or multiple recipients and can be combined with the previous tax year’s allowance if it was unused, effectively allowing a £6,000 gift in one tax year.
When asked about documentation, Ms Spencer advised that all gifts, including the small £250 allowance and the £3,000 large gift allowance, should be recorded in writing and kept alongside one’s will. This helps when completing inheritance tax forms, as recipients need to declare gifts made in the years preceding death.
In summary, the £3,000 annual gift allowance remains a key tool for minimizing inheritance tax, particularly in light of forthcoming pension tax changes. Proper planning and record-keeping are essential to make full use of available exemptions and preserve wealth for future generations.