Longstanding gifting rules used as a way to avoid inheritance tax could be under threat in next week’s Budget. Those at risk of leaving their loved ones an inheritance tax bill are being encouraged to review their finances and consider giving money away now where it makes sense for them.
More than one in every 10 retired people (15%) said changes to inheritance tax is their biggest Budget fear, according to a survey of 2,000 people for wealth firm Hargreaves Lansdown in October.
Since the summer, rumours have been swirling that inheritance tax (IHT) could once again be a target. One way chancellor Rachel Reeves could potentially increase IHT receipts is by raising the taxes on giving money away – known as gifting – it has been speculated.
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However it is unlikely any Budget tax rises, if they do happen, would be put into practice before the new tax year in April 2026, so those considering making gifts likely still have time to look over their finances, review their options and potentially reduce their inheritance tax bill.
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Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Sensible gifts can help support younger family members at a time when you’re still around to see them make the most of the money. It also gives you more control over how gifts are given – as well as cutting a potential inheritance tax bill.
“However, you need to consider it carefully. Giving away too much, too soon, can end up doing more harm than good if you don’t have enough money to fall back on later in retirement.”
How could inheritance tax gifting rules change in the Budget?
Lifetime gifts
At the moment, you can give gifts of any size and, as long as you live for seven years after making the gift, it falls out of your estate for inheritance tax purposes – known as the seven year rule. But the government is said to have been looking at limiting the total value of these one-off gifts people can make during their lifetime.
Taper relief
Taper relief, which applies if you give away more than the inheritance tax threshold of £325,000 – also known as your nil rate band – before you die, but die within seven years, could also be curtailed. Taper relief means the rate of inheritance tax your loved ones pay on the gift you give them gradually falls between three and seven years after giving the gift, cutting your tax bill.
Extending the seven year rule
Increasing the period you have to live after making a gift in order for it to leave your estate is another option open to the government. If it rose to ten years it would make tax planning more difficult, and drag more people back into paying inheritance tax.
Changing gifts from surplus income rules
The government could revisit annual allowances as well as rules that mean regular gifts can be made from income. However, the fact the annual gift allowance – £3,000 per gift, per recipient – has remained frozen for decades means allowances aren’t as generous as they once were, which would limit how much extra revenue this would bring in.
How can I use gifting rules to avoid IHT now?
When done properly, gifting can allow you to make payments to family or friends without those payments being subject to inheritance tax.
David Lunn, partner in the private client team at TWM Solicitors, said: “Taking professional advice when considering gifting can yield significant benefits, particularly where larger sums are involved. You may be able to gift more than you initially thought and make savings.
“On the other hand, rushing through without planning is a dangerous game which is not recommended.”
As the chancellor is reducing the value of inheritance exemptions under Agricultural Property Relief and Business Property Relief from next April, gifting has become increasingly important as a way of reducing IHT.
TWM Solicitors, a private wealth and family law firm, highlights five things about gifting to consider before the Budget on 26 November.
1. Keep good records of gifts
Keep detailed records of any gifts you give, as this will greatly help the executor of a will. Executors often have to pore over years of bank statements to prove to HMRC that the gifting was done properly, so a failure to keep adequate records could lead to a lot of additional administration and detective work, causing delays. Good record keeping can save time, money and tax.
2. Do not give away too much…
People need to think carefully about how much money they will need towards the end of their lives. If you have too much, it will be subject to IHT. On the other hand, giving away too much comes with risks.
For example, if you need significant social care in the future and are unable to fund it from what you retain, your local authority might determine that you intentionally gave away your assets to avoid paying care fees. If so, it will treat you as if you still had said assets. This would place the burden on those who received the gifts or your heirs and, if they do not pay up, it could leave you needing care with nobody able and willing to pay for it.
3. …But don’t ‘under gift’ either
In TWM’s experience, the people who are likely to get caught out by inheritance tax, out of caution, keep too much money in their estate. By retaining more money than they need, they will leave heirs with a bigger IHT bill than necessary.
For example people often overestimate how much they will have to pay for a care home and their likely longevity. People also often forget that the cost of a care home need not be funded entirely out of capital – if you have a healthy income, this can go a long way towards meeting care fees. That being the case, TWM said individuals should consider gifting money to their loved ones earlier in life.
There are several different tax-free gift allowances that people are failing to make maximum use of:
- These include the £3,000 annual exemption, which, if you do not use it in a given year, can be rolled over once to the following year to make £6,000.
- Others include making wedding gifts of £5,000 per child, £2,000 per grandchild and £1,000 for anyone else.
- You are also allowed to make an unlimited number of small gifts of up to £250 per person annually, provided you have not used one of your other gift allowances for that person.
4. Use surplus income wisely
IHT will be applied to lifetime gifts given from your savings or other assets, unless you live for seven years after giving them, or your total chargeable estate is under the IHT threshold. If the money you are gifting is from income you do not need, there is no limit if it is done correctly.
However, this exemption is subject to various rules and procedures, and advice should be taken before proceeding. You may need to prove that the money was surplus to your requirements.
5. Be careful under a power of attorney
If you are acting under a power of attorney on behalf of someone else, your ability to give gifts on their behalf is extremely limited. Beyond that, you must obtain permission from the Court of Protection if you wish to make further gifts. Failing to do so puts you at risk of the court making you take back the gift or your power of attorney being revoked. HMRC may judge your gifts to be invalid and chargeable to IHT.
