How to gift money tax-efficiently: Seven Inheritance Tax rules explained
26th November 2025
When you pass away, you will want as much of your wealth as possible to pass directly to your loved ones without it being subject to Inheritance Tax (IHT).
As a result, you may be looking for tax-efficient ways to give money and assets to the next generation – such as gifting funds over the course of your lifetime.
In some cases, financial gifts you make now may still be included in your estate for IHT purposes after you pass away. This can include:
- Money
- Physical items
- Property
- Stocks and shares
- Assets sold for less than their full value.
The good news is that there are several exemptions available to help you gift your wealth to loved ones, without worrying about future tax implications.
Here are seven ways you may be able to mitigate your estate’s IHT bill through gifting.
- Gifts made more than seven years before you pass away are typically exempt from Inheritance Tax
When you pass away, the value of your estate exceeding the nil-rate bands will typically be taxed at a rate of 40%. As of 2025/26, the nil-rate band is frozen at £325,000 until 2030, while the residence nil-rate band is frozen at £175,000.
In some cases, gifts made during your lifetime may count towards your nil-rate band as part of your estate.
Provided you don’t pass away within seven years of giving away funds or assets, you can usually give an unlimited amount to loved ones without the value counting towards your nil-rate band. After seven years, your gift typically will not be considered part of your estate.
That said, none of us know for certain how long we will live. So, if you’re worried about your beneficiaries facing a significant tax bill after you pass away, you might consider taking advantage of the exemptions listed below.
- Your gift may be taxed with a tapered Inheritance Tax rate if you pass away within seven years
During the seven-year period, the gift will normally be treated as a potentially exempt transfer (PET), Unless the gift is to a flexible or discretionary trust – in which case the gift will be a chargeable lifetime transfer (CLT). If you pass away during this time, the value may be included in your estate for IHT purposes. The standard rate of IHT is 40%.
On a positive note, PETs and CLTs may be eligible for taper relief – meaning the applicable rate of IHT could depend on how recently you gave the gift when you pass away. As of 2025/26, taper relief could be applied as follows:
| Years between gift and death | IHT rate on gift |
| Less than three years | 40% |
| Three to four years | 32% |
| Four to five years | 24% |
| Five to six years | 16% |
| Six to seven years | 8% |
Bear in mind that any gifts subject to IHT will typically be counted towards your nil-rate band before any other assets. So, your beneficiaries may only benefit from taper relief if you have no remaining nil-rate band (2025/26).
- You could gift up to £3,000 a year without the value being subject to Inheritance Tax
Each tax year, you can usually give gifts up to the annual exemption without them being included in your estate, regardless of when you pass away. As of 2025/26, the annual exemption is £3,000.
Additionally, you can carry any unused exemption over by one year, provided you have used your full annual exemption in the current tax year. You can split this exemption among as many people as you like – for instance, if you have two children, you may be able to give them £1,500 each.
It’s also worth noting that everyone has their own individual allowance. If you have a partner and you both carried your full allowance forward from the previous year, you could give up to £12,000 as a couple in a single tax year without the gift becoming a PET.
- Gifts to your spouse are exempt from Inheritance Tax
Usually, you won’t need to pay IHT on gifts given to your spouse. Provided they permanently live in the UK, and you are legally married or in a civil partnership, you can gift them an unlimited amount without the value being included in your estate for IHT purposes.
- You could gift £250 a year to an unlimited number of people
The small gift allowance allows you to give an unlimited number of gifts a year, up to the value of £250 per person, without the value being subject to IHT.
This allowance usually cannot be used in conjunction with other exemptions. For example, if you gave someone £3,000 under the annual exemption, you generally can’t use the small gift allowance to give them a further £250 tax-free in the same year.
That said, birthday and Christmas gifts paid for out of your regular income are typically exempt from IHT (more on this later). It stands to reason that, even if you have used up your exemption for one person, you can often still give them something for these occasions without worrying about the gift being included in your estate after you die.
- You can give tax-free wedding or civil partnership gifts, up to a certain amount
When someone is getting married or starting a civil partnership, you can often give a gift without it potentially being included in your estate later on. The amount you can give tax-free depends on your relationship to them.
| Relationship | Allowance |
| Your child | £5,000 |
| Your grandchild or great-grandchild | £2,500 |
| Anyone else | £1,000 |
You can also combine these allowances with your annual exemption. So, if your child is getting married, you could gift them up to £8,000 in one tax year.
- Regular gifts from your income could be exempt from Inheritance Tax
Finally, you may be able to give regular gifts without them potentially being included in your estate for IHT purposes.
Whilst there is no limit on how much you can give, in order to qualify for the exemption, the gift (transfer of value) must:
- form part of the transferor’s normal expenditure,
- be made out of income, and
- leave the transferor with enough income for them to maintain their normal standard of living.
For example, you could make regular payments to help your child pay their rent. However, if those payments mean you have to dip into your savings to afford your own mortgage payments, you might not qualify for the exemption.
Regular gifts can be combined with any other allowance, except for the small gift allowance.
Keeping detailed records could help avoid an unnecessary tax bill after you pass away
When the time comes for your estate to be evaluated for IHT purposes, it will fall to the person managing your estate to prove which exemptions are applicable.
As a result, it’s important to keep accurate, detailed records of your gifts to help ensure they aren’t subject to IHT unnecessarily. It’s often worth recording what gifts you gave, who you gave them to, when, and their value.
Not only can this help minimise your estate’s IHT bill, but you could also reduce the administrative burden for whoever manages your estate after you pass – whilst helping to avoid a delay in your beneficiaries receiving their inheritance.
Discover how we can help you pass on your wealth, whilst mitigating your estate’s Inheritance Tax liability.
Get in touch
Email us at enquiries@pen-life.co.uk, or call 01904 661140.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
Category: Financial Planning, IHT
