Making Lifetime Gifts: How to Give Without Paying More Inheritance Tax

June 24, 2025

Many people want to help their children or loved ones while they are still alive to see the benefit. Whether that is helping with a deposit for a first home, covering school or university fees, or simply making cash gifts. Others see gifting as a valuable Estate planning tool. Done correctly, it can reduce the size of your Estate and potentially lower your Inheritance Tax (IHT) liability when you pass away.

However, without careful planning, a well-meaning gift could lead to unintended tax consequences.

Here is what you need to know about looking after your loved ones in your lifetime without giving more to HMRC than you need to.

What is the Nil Rate Band?

Every individual has a Nil Rate Band. This is the threshold up to which your Estate can be passed on without incurring an Inheritance Tax liability. Currently the Nil Rate Band is £325,000 per person. Some Estates may also qualify for the Residence Nil Rate Band which is currently £175,000.  Anything above the available Nil Rate Bands may be taxed at 40% IHT upon your death, unless exemptions or reliefs apply.

However, any gifts that are made in the seven years prior to your death, in excess of your available exemptions, may reduce your Nil Rate Band. Careful planning can help ensure you maximise any available exemptions to ensure this threshold can be applied in full on your death.

When Is a Gift Tax-Free?

Some gifts are automatically exempt from Inheritance Tax, no matter when they are made. These include:

  • The £3,000 annual exemption – You can give away up to £3,000 each tax year without any Inheritance Tax consequences. If unused, this allowance can be carried forward for one year.
  • Small gifts exemption – Perfect for birthdays or Christmas: gifts of up to £250 per person, per tax year, are exempt, provided the recipient does not receive any more than £250.  It is important to note that this cannot be used in conjunction with the annual exemption, and therefore the recipient cannot receive part of your £3,000 exemption as well!
  • Wedding gifts – Allowances range from £1,000 to £5,000 depending on your relationship to the couple.
  • Gifts to spouses or civil partners – Unlimited and completely exempt, provided both parties are UK-domiciled.
  • Gifts to charities (and Community Amateur Sports Clubs (CASCs)) registered in the UK – are also fully exempt from Inheritance Tax.

These exemptions are often overlooked but, when used consistently, can have a meaningful cumulative impact over time.

The Seven-Year Rule and PETs

Larger gifts that don’t fall under any exemption are classed as Potentially Exempt Transfers (PETs). If you survive seven years after making the gift, it will fall outside your Estate for Inheritance Tax purposes, becoming fully exempt.

If you die within seven years, the gift will use up some (or all) of your Nil Rate Band. If you have made gifts in excess of your Nil Rate Band, taper relief may reduce the amount of Inheritance Tax payable depending on how long ago the gift was made.  It is important to remember that taper relief reduces the Inheritance Tax due, and not the value of the gift itself!

This is where early and well-documented gifting, or the use of alternative structures like Trusts, can make a real difference.

How to use Trusts to Reduce Inheritance Tax

Trusts can be a powerful tool for managing and protecting wealth, particularly where large gifts or long-term planning are involved, essentially aiming to remove certain assets from your taxable Estate and therefore reducing your overall Inheritance Tax bill.

Depending on the type of Trust and how it’s used, it may allow you to:

  • Remove assets from your Estate now, so that any future growth occurs outside of your Estate. This can be particularly valuable when transferring assets like shares, property, or business interests that are likely to appreciate significantly over time.
  • Control how and when funds are accessed by beneficiaries, which is especially useful where children or vulnerable individuals are involved, for example, funding school fees.
  • Ring-fence assets to help with care fee planning or protect family wealth after a divorce or remarriage.

Common Trust types include Discretionary Trusts, Interest in Possession Trusts, and Bare Trusts, each with their own tax treatment and benefits. However, Trusts are not tax-free. They may attract Inheritance Tax entry, periodic, and exit charges and must be set up and managed carefully.

Trusts are often most effective when set up early, alongside other gifting or Estate planning strategies. Choosing the right structure and understanding the timing is key and professional advice is essential.

Gifts Out of Surplus Income

A lesser-known but effective way to make tax-free gifts is by giving from surplus income, rather than capital. These gifts are immediately exempt from Inheritance Tax if:

  • They come from your surplus net income (not capital);
  • They are part of a regular, habitual pattern of giving; and
  • You retain enough income to maintain your usual standard of living.

Many clients are surprised by how this exemption can be used to benefit their families.  However, it is essential that advice is taken to ensure that you are making gifts from your surplus income and that robust documentation is maintained to provide to HMRC to accept the exemption upon your death. We can help you put in place the right records and strategy to help document your intentions in line with their requirements.

How to Avoid Unintended Tax Traps

We regularly advise clients on the risks of gifts with reservation of benefit, where you give something away but continue to use or benefit from it (for example, giving away your home but continuing to live in it rent-free). In such cases, HMRC will still treat the asset as part of your Estate for Inheritance Tax purposes.

Other pitfalls include failing to document your intentions, gifting too late, or making inconsistent decisions that do not align with your wider Estate planning.

If you are unsure whether a gift you have made or are planning to make might trigger these rules, we can help assess your situation and advise on safer alternatives.

Final Thoughts

Lifetime gifting and Trusts can be highly effective ways to support your family and reduce your Estate’s future tax burden, but the rules are complex and the stakes are high.

Whether you’re looking to:

  • Record lifetime gifts,
  • Equalise gifts between children,
  • Make gifts out of your surplus income,
  • Explore the use of Trusts, or
  • Understand how previous gifts might affect your Estate…

We are here to guide you through the options that best suit your circumstances.

Contact our Private Wealth & Tax team today for tailored, expert advice on preserving and passing on your wealth.

Nicole Miller
Legal Director, Private Wealth & Inheritance
<script>
document.addEventListener('DOMContentLoaded', function () {
  const deptEl = document.getElementById('acf-author-department');
  const department = deptEl?.dataset?.department;

  if (typeof gtag === 'function' && department) {
    gtag('set', { author_department: department });
  }
});


  window.dataLayer = window.dataLayer || [];
  const dept = document.getElementById("author-department")?.textContent?.trim();
  if (dept) {
    window.dataLayer.push({
      event: "authorDataReady",
      author_department: dept
    });
  }

</script>
View profileContact Us
Alexandra Hawkes
View profileContact Us

This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

Latest Legal Insights

Best Law Firms 2024

Herrington Carmichael has once again been named in the Times Best Law Firms. We were first listed in 2023 and have once again made the Best Law Firms list for 2024.  

www.thetimes.co.uk/article/herrington-carmichael

Best Law Firm 2024
<h1 class='my-heading'>Just some HTML</h1><?php echo 'The year is ' . date('Y'); ?>