Gifting can be one of the most personal parts of estate planning. Many people would rather help children, grandchildren or other loved ones while they are still alive, whether that means contributing towards a house deposit, education costs, savings or everyday financial pressure.

However, giving money or assets away does not always mean they immediately fall outside your estate for Inheritance Tax purposes. The rules depend on what you give, who receives it, when the gift is made and whether an exemption applies.

At DG Financial Services, we help clients understand how lifetime gifting fits alongside their wider estate planning. Your own financial security should come first, followed by a clear plan for passing on wealth in a way that is affordable and tax-aware.

How Inheritance Tax works

Inheritance Tax, often shortened to IHT, is generally charged at 40% on the taxable value of an estate above the available tax-free thresholds.

For the 2026/27 tax year, the standard nil-rate band is £325,000. A residence nil-rate band of up to £175,000 may also apply when a qualifying home is passed to direct descendants, such as children or grandchildren.

Where both allowances are fully available, an individual may be able to pass on up to £500,000 before IHT becomes payable. For married couples and civil partners, unused allowances can sometimes be transferred to the survivor, potentially increasing the combined amount to as much as £1 million.

These figures are not automatic. The residence nil-rate band is subject to conditions and begins to taper for estates worth more than £2 million. Lifetime gifts, trusts, property ownership and liabilities can also affect the final calculation.

How gifts affect Inheritance Tax

Many outright gifts to individuals are treated as potentially exempt transfers, often called PETs.

If you survive for seven years after making the gift, it will usually fall outside your estate for Inheritance Tax purposes. If you die within seven years, the gift may still be taken into account when calculating the tax due. This is commonly known as the Inheritance Tax seven-year rule.

Dying within seven years does not automatically mean the recipient will face a tax bill. The outcome depends on the value and timing of the gift, other gifts made during the relevant period, available exemptions and how much of the nil-rate band has already been used.

Taper relief can sometimes reduce the tax payable on gifts made more than three years before death. It does not reduce the value of the gift itself and generally only becomes relevant where total chargeable gifts exceed the available nil-rate band.

How much can you gift tax free?

Several Inheritance Tax gifting allowances can allow money or assets to leave your estate immediately without being caught by the seven-year rule.

The main exemptions include:

• Annual exemption: Up to £3,000 each tax year. Any unused allowance can normally be carried forward for one tax year only.
• Small gifts exemption: Up to £250 per person each tax year, provided another exemption has not been used for the same person in relation to that gift.
• Wedding or civil partnership gifts: Up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to another person.
• Gifts between spouses or civil partners: Generally exempt, although the rules can be more complex where one person is not a long-term UK resident.
• Gifts to qualifying charities: Generally exempt from Inheritance Tax.

Leaving at least 10% of the relevant net estate to qualifying charities can also reduce the IHT rate on the taxable part of an estate from 40% to 36%, subject to the relevant conditions.

Regular gifts from income

One of the most useful Inheritance Tax exemptions is also easy to overlook.

The normal expenditure out of income exemption can allow regular gifts to fall outside your estate immediately, provided they form part of your normal spending, are made from income and do not reduce your usual standard of living.

This can be relevant for people with surplus income from earnings, pensions, dividends, interest or rental income. Examples might include contributing regularly to a child’s living costs or paying into a grandchild’s savings.

There is no fixed monetary limit, but the gifts must genuinely be affordable from income after your normal living costs have been met.

Good records matter. Executors may later need to show the pattern of gifts, where the money came from and that the payments did not force you to rely on capital or reduce your normal lifestyle.

Watch for gifts with reservation

Giving an asset away while continuing to benefit from it can create a different problem.

This is known as a gift with reservation of benefit. A common example is transferring a home to children but continuing to live in it rent-free. Although legal ownership may have changed, the property can still be treated as part of the donor’s estate for Inheritance Tax purposes.

Similar issues can arise with other assets where the person making the gift continues to use, control or benefit from what has been given away.

Why timing and records matter

Inheritance Tax gifting rules are cumulative, which means the order and timing of gifts can affect the eventual tax position. Transfers into trusts can also be treated differently from outright gifts to individuals.

Keeping a clear record of each gift is therefore important. This should include the date, value, recipient, type of asset and any exemption being relied upon.

These records can make it much easier for executors to work out what needs to be reported after death.

Protect your own financial security

Reducing a potential Inheritance Tax bill should not come at the expense of your own long-term security.

Before making substantial gifts, consider the income and capital you may need throughout retirement, including everyday spending, inflation, home maintenance, healthcare, emergencies and possible later-life care.

Once money or assets have been given away, you may not be able to recover them if your circumstances change. A financial plan can help you understand what you can realistically afford to gift while retaining enough flexibility for your own future.

Pensions and Inheritance Tax from 2027

Pensions are also becoming more important in estate planning.

From 6 April 2027, most unused pension funds and pension death benefits will be included in the value of a deceased person’s estate for Inheritance Tax purposes. This could change the IHT position for families who have previously expected unused pension wealth to sit outside the estate.

It may therefore be sensible to review pension beneficiary nominations, retirement income plans and wider gifting strategies as part of an overall estate review. However, pension decisions should not be driven by tax alone. Retirement income and financial security remain central.

How DG Financial Services can help

Inheritance Tax and gifting can appear straightforward until several rules begin to overlap. The seven-year rule, gifting exemptions, surplus income, pensions, property and family circumstances can all influence the eventual outcome.

At DG Financial Services, we can help you understand your potential Inheritance Tax exposure and consider how gifting fits into your wider financial plan. The aim is not simply to reduce tax, but to balance generosity with financial security, flexibility and the needs of the people you want to support.

Could gifting form part of your plan?

Lifetime gifts can be a meaningful way to support loved ones and may also help reduce future Inheritance Tax exposure. The important part is knowing what you can afford to give, which exemptions may apply and how each decision fits into the wider estate.

To discuss your estate planning and gifting strategy, contact DG Financial Services.

THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE. TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND MAY CHANGE. INHERITANCE TAX, ESTATE PLANNING AND TRUSTS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY. THE VALUE OF INVESTMENTS AND ANY INCOME FROM THEM CAN GO UP OR DOWN. YOU MAY GET BACK LESS THAN YOU INVEST. GIFTING MAY AFFECT YOUR LONG-TERM FINANCIAL SECURITY AND SHOULD BE CONSIDERED CAREFULLY BEFORE ANY DECISION IS MADE.