Many families worry about inheritance tax (IHT) and need support on how they can make sure their hard-earned money and assets are passed to loved ones rather than to HM Revenue & Customs (HMRC).
Inheritance tax is charged at a rate of 40% on estates worth more than £325,000 (also known as the nil-rate band).
For individuals, there is also the “main residence nil-rate band” – currently £175,000 – which exempts all or part of the value of the family home from IHT provided the beneficiary is a child or grandchild.
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The main IHT exemption, the ‘nil rate band’, has been frozen at £325,000 since 2009.
According to analysis by AJ Bell, if both the nil rate band and residence nil rate band were indexed to inflation, the combined total would now stand at around £1.6 million.
However, in the October Autumn Statement, Chancellor Rachel Reeves said these bands will be frozen until 2030.
As a result of frozen thresholds combined with climbing property prices and wealth, HMRC collected £8.2 billion in IHT between April 2024 and March 2025 – the fourth consecutive annual record sum. It surpasses the £7.5 billion total from the tax in 2023/24 by £750 million, or 10%.
One way to reduce an inheritance tax bill and significantly improve the finances of the younger generation is to give away money while you are still alive.
New calculations from interactive investor reveal how making regular gifts using IHT gifting exemptions – rather than a one-off lump sum – could save your family up to £37,000 in tax.
Making regular gifts over seven years vs. one-off gifts
| Header Cell - Column 0 | Annual gifts | Total gifts value over 7 years | IHT due |
|---|---|---|---|
Gifts from excess income | £10,000 | £70,000 | £0 |
Annual gifting allowance | £3,000 | £21,000 | £0 |
Small gifts | £1,500 | £10,500 | £0 |
Total | £14,500 | £101,500 | £0 |
| Header Cell - Column 0 | Value of gift | IHT due |
|---|---|---|
Gifts from excess income | £70,000 | £26,800 |
Annual gifting allowance | £21,000 | £7,200 |
Small gifts | £10,500 | £3,000 |
Total | £101,500 | £37,000 |
Source: interactive investor. Assumes the nil rate band (£325,000) and residence nil-rate band (£175,000) has already been used, and one year of carry-forward allowance has already been used.
Kirsty Anderson, savings and pensions specialist at M&G Wealth, says a popular move is for grandparents to help grandchildren as a way of reducing the value of their estate.
She tells MoneyWeek: “Whilst grandparents don’t want to give up all control of their money, if they are financially able to help grandchildren now, and see the benefit, not only does it help the grandchild, but it helps to reduce any possible IHT liability on their estate."
So, if you want to avoid paying the tax and start passing on inheritance money while you're still alive, what’s the best way to do it?
Before you start splashing the cash, think about how much you will need. Only give away what you can afford to lose; don’t risk your retirement or money to cover future care costs.
Anything you give away will not count towards a future IHT bill, provided you live for seven years after the gift.
But there are also gifts that become immediately free of IHT, you just need to know the limits and rules around this.
Here’s our guide to the gifting rules.
What gifts are exempt from inheritance tax?
The first thing to note is that gifts of any value between UK-domiciled spouses and civil partners are free from inheritance tax.
Lesley Mackintosh, founder of Independent Women, a community of financial advisers, adds that the same is true for gifts to charity, as they are always IHT-free.
“Your gift can make a significant difference in others’ lives while also reducing your potential IHT bill,” she comments.
In terms of giving to other people, such as children, grandchildren, friends or other relatives, monetary presents can be free from tax as long as they meet the following conditions:
- Total gifts made by you in a tax year are less than £3,000 – or £6,000 for a couple. You can also carry forward any unused £3,000 allowance from the previous tax year, making financial gifts of up to £6,000 possible – or £12,000 for a couple.
- Small gifts of up to £250 can be made to any number of people in the tax year, provided the total to any one person does not exceed £250. If it does, this exemption does not apply and all gifts would start to use up the aforementioned £3,000 allowance.
- Gifts out of surplus income can also be made. These gifts must be “regular” in nature, made from income rather than capital, and cannot affect the donor’s standard of living.
- Money can also be given as a gift tax-free to celebrate a marriage or civil partnership, of up to £5,000 from each parent, £2,500 from each grandparent and up to £1,000 from any other person. These do not use up any of the other allowances.
Ian Dyall, head of estate planning at wealth management firm Evelyn Partners, comments: “These exempt gifts reduce the size of the gifter’s estate immediately.
"A growing number of estates are finding themselves just the wrong side of the frozen nil-rate band of £325,000, so even modest lifetime gifts could come in useful as a way of saving executors and beneficiaries the rigmarole and expense of settling IHT before probate.”
Mackintosh adds that keeping a record of any cash gifts is important as it will help your executors in the future and assist your estate passing through probate as quickly as possible to the people you intend it.
Gifting from surplus income
Gifting £10,000 annually from surplus income over seven years could save £26,800 in IHT, compared to gifting the same amount as a lump sum (£70,000), according to interactive investors’ calculations.
Craig Rickman, personal finance expert at interactive investor, says: “Any gifts given from surplus income (i.e. income not spent on living costs) are immediately excluded from your estate for IHT purposes – even if you die within seven years.
“This little-known rule is powerful yet underused – only 430 families claimed this exemption in the 2022/23 tax year. For example, if you earn £30,000 after tax and spend £20,000, you could give away £10,000 with no IHT implications.”
However, he says it’s essential to keep detailed records to prove the gifts were made from surplus income. Without this, your family could face a tax charge if you die within seven years.
Can I make smaller gifts free of inheritance tax?
Making full use of the £3,000 annual exemption over seven years could save £7,200 in IHT, by interactive investors’ calculations. This assumes one year of carry-forward allowance has already been used – where you could gift £6,000 this tax year if you didn’t use the exemption last year.
Furthermore, giving £250 to six individuals annually could save £3,000 in tax over seven years, compared to gifting a lump sum of £10,500.
Rickman says: “In addition to the £3,000 gifting allowance, you can also make a series of £250 gifts to different individuals – as long as you haven’t used another allowance for the same person.
“If you gift £250 to six people each year (£1,500), over 20 years you could gift £30,000 tax-free, potentially cutting your IHT bill by £12,000.
“It’s surprising how much even small gifts can add up over time. And when they fall within the IHT gifting rules, they can result in significant tax savings.”
How does the seven-year inheritance tax rule work?
If you intend to give money that exceeds the above gifting rules – for example, £10,000 from your savings as a present for a granddaughter to help her buy a property – then the seven-year rule applies.
This means the gifts are referred to as “potentially exempt transfers”. If you die within seven years, the nil-rate band is reduced by the value of the gifts (so in a sense they are counted as never having left the estate), and tax on assets above the threshold will be due at up to 40%.
Dyall explains: “We say ‘up to’ because if the gifts put together exceeded the nil-rate band then taper relief can apply, which reduces the tax paid on older gifts. If there were three to four years between the date of gift and death, the IHT rate lowers to 32%, while at six to seven years the rate falls to just 8%. All of which means that large gifts exceeding the nil-rate band can reduce an IHT liability even if they fall foul of the seven-year rule.”
Think about where the money is going that you are gifting.
Is it going to sit in your loved one’s savings account? If so, beware of the recipient having to pay income tax on their interest, if it breaches their personal savings allowance.
Mackintosh comments: “To avoid an income tax liability on the cash gift you are making, consider other savings products such as an ISA (cash or stocks and shares), junior ISA, or potentially even a pension.
"All of these provide a tax-free environment in which your gift can grow and compound, and in the case of a pension, is immediately increased by 20%, 40% or 45%, depending on your loved one’s tax rate.”
We clear up some common misconceptions in our "inheritance tax myths debunked" guide.
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