Inheritance Tax on gifts: what are the rules?
Many people want to help their family while they are still around. It might be a deposit for a grandchild to buy a house, help with university costs, or simply passing on some of what you have saved.
Most gifts will not lead to any Inheritance Tax (IHT), and some are exempt straight away.
In this blog, our estate planning solicitors explain how Inheritance Tax rules affect financial gifts.
How Inheritance Tax affects gifts
IHT is charged at 40% on the value of an estate above the nil rate band, which is currently £325,000 (as at November 2026).
If you leave your home to your children or grandchildren, an extra residence nil rate band of up to £175,000 may also apply. Married couples and civil partners can usually combine their allowances.
These IHT thresholds are frozen until April 2031, which feels reassuring, but as property prices rise, more families are finding their estate is over the limit. This is where gifts can be useful.
Giving assets away during your lifetime can reduce the size of your estate. But gifts are not always ignored for tax purposes, and the rules depend on the type of gift, the amount and when you die.
Gifts that are exempt from Inheritance Tax
The following gifts do not count towards your estate:
- Your annual exemption. Anyone can give away capital totalling £3,000 per tax year (6th April to 5th April). You can give it to one person or split it between several.
- Small gifts out of income. You can give up to £250 to as many people as you like each tax year. Just make sure you don’t use this on someone who has also received all or part of your annual exemption.
- Wedding gifts. You can give your child up to £5,000 for their wedding or civil partnership, and £2,500 to a grandchild or great-grandchild. You can also give £1,000 to anyone else. This gift must be made on or shortly before their big day.
- Help with living costs. You can make payments to a spouse or a partner, or a dependant who is under 18 or in full-time education.
Many people do not realise they can make gifts from a regular income. It’s important to keep a record of this so that your executors have the relevant evidence in case anything comes into question.
It’s important to note that giving away assets other than cash, such as a property, can create a Capital Gains Tax bill, even though no money changes hands.
Is there a seven-year rule for gifts?
Yes, if you live for seven years after making the gift, it generally drops out of your estate. If you die within seven years, it is added back and may be subject to IHT. If you die between three and seven years after the gift, taper relief applies.
Taper relief reduces the tax payable on a gift, not the value of the gift itself and only helps where the gift is above the nil-rate band.
Current taper relief bands are:
| Years between gift and death | Tax paid |
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
The tax is claimed back from the recipient of the gift. For example, if you give your grandchild £20,000 towards their house deposit but pass away two years later, they could be required to pay £8,000, even if they’ve already spent the money.
Who pays the tax on gifts?
If IHT is due on a gift, the person who received it usually has to pay. The executors must report gifts made in the seven years before death, which is why records and receipts are essential.
What about gifts into a Trust?
Gifts into Trusts are generally treated differently from gifts to individuals. They can lead to an Inheritance Tax charge during your lifetime if they are above the nil rate band, and the seven-year clock works differently. Our Trusts lawyers can explain whether a Trust suits your situation.
Beware of making gifts to avoid care fees
If you make gifts and give away assets and later need care, the local authority can treat this as deliberately reducing your wealth to avoid paying care fees. Timing and reasons for gifts matter.
Can I gift my house to my children?
Yes, you can gift your house to your children either during your lifetime or within your Will. If you do so before you die and you carry on living there without paying rent, it is likely to still form part of your estate, so it will be subject to IHT. There may also be Capital Gains Tax to pay, so seek financial advice first.
Giving away your largest asset carries risk and is not generally recommended without seeking advice first.
Changes in 2027
From April 2027, most unused pension funds will count towards your estate for Inheritance Tax purposes. We explain what this means in our blog on pensions and IHT.
What to do before you give a gift
- Keep a record of each gift to help your executors
- Don’t gift beyond your means; gifts are hard to reverse
- Check that your Will is up to date and reflects any significant gifts you have made
Further information
For legal advice on planning for the future, call our estate and tax planning solicitors in Bristol on 0117 325 2929 or complete our online enquiry form.