Effective gifting requires careful planning, awareness of interactions with pensions, trusts and capital gains tax, and robust record-keeping. Professional advice is essential to avoid unintended tax consequences and ensure gifts achieve their intended purpose.
In this article, Samantha Warner, Legal Director at Winckworth Sherwood looks at the basic principles for IHT mitigation and why lifetime gifting remains a key estate-planning priority.
Advisors across the UK saw a flurry of gifting activity in the weeks before the Budget, as rumours of a cap on lifetime gifts pushed many wealthy families to bring forward their plans to pass cash or other assets on to the next generation.
The rumoured changes did not materialise, but the threat of such restrictions in the future, combined with the changes to the inheritance tax (“IHT”) treatment of pensions from April 2027 means that lifetime giving remains high up on the list of estate planning priorities.
For those wanting to make the most of their gifting allowances in 2026, the key is to maximise your IHT exemptions, whilst staying within the rules and avoiding unexpected tax consequences. So what are the gifting rules and what else do we need to consider?
Gifts and Inheritance Tax: The Framework
In the UK, there is no lifetime gift tax as such – instead, the focus is on the IHT treatment of lifetime transfers. Most gifts made during lifetime are classified as ‘potentially exempt transfers’ (“PETs”). A PET will escape IHT provided the donor survives for at least seven years after making the gift. If the donor dies within that seven-year period, the gift is reconsidered for IHT purposes and may attract tax depending upon timing and value.
The current nil-rate band – the threshold below which no IHT is payable – remains at £325,000. If the total value of PETs and other chargeable transfers in the seven years before death exceeds this threshold, IHT at 40% may be due.
Timing, Taper Relief and the Seven-Year Rule
The famous ‘seven-year rule’ underpins the UK gifting regime. Gifts that qualify as PETs are exempt if the donor survives the full seven years following the transfer.
If death of the donor occurs sooner and the total value of the donor’s gifts is under the IHT threshold, the value of those gifts will simply reduce the amount of the nil rate band that can be applied against the estate on death.
If the gifts made are in excess of the nil rate band and death occurs within the seven years, IHT will be charged at the full 40% rate on that excess, but if the donor survives a gift by at least three years, taper relief applies. This reduces the rate of IHT payable on the taxable part of the gift on a sliding scale from 32% at three to four years, down to 8% at six to seven years. This taper relief can be extremely valuable, particularly where very large gifts have been made. However careful planning and record-keeping are required to ensure all gifts are accounted for and that the donor is aware where any tax liability will fall.
Annual Allowances and Exemptions
Several allowances permit tax-free gifts irrespective of the donor’s survival period:
Annual Exemption: Clients can give away up to £3,000 each tax year without these gifts counting towards their estate for IHT. This allowance can be carried forward once if unused in the prior year. Additionally, the allowance is per gift-giver meaning that each spouse in a married couple can gift £3,000 each, allowing for gifts of £6,000 per annum between them, and up to £12,000 in the first year if the full carry forward is available.
Small Gift Exemption: Clients can make unlimited gifts of up to £250 per person per tax year, provided another allowance has not been used on the same recipient.
Wedding/Civil Partnership Gifts: Tax-free gifts are permitted on or shortly before a marriage or civil partnership, with limits of £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to others.
Normal Expenditure Out of Income: Regular gifts from surplus income – for example, monthly support payments – can be exempt if they do not diminish the donor’s usual standard of living. This exemption can be extremely valuable as it allows those with an income which exceeds their expenditure to pass on all or part of the surplus each tax year. However these gifts must be regularly made and properly documented to show that the payments were made from income rather than capital. Detailed records of annual income and expenditure should therefore be kept to ensure those administering an estate have the information to claim the exemption on death.
Effective Lifetime Giving
Effective gifting requires careful planning, not least to ensure clients have considered their own needs before making gifts to others. There could also be unexpected interactions with other parts of their financial planning, such as family trusts or a pension, which need to be thought through.
Gifting can also lead to unexpected tax consequences, such as a capital gains tax liability on the gift of a property, or continuing to benefit from an asset that has given away which will stop the seven-year IHT clock from running and leave the value of that asset in the client’s estate.
Professional advice therefore remains indispensable and a well-structured and documented gifting plan, supported by good record-keeping might just be the best gift for a client and their family.
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