A report in Professional Adviser confirmed that a total of £8.2 billion was paid in Inheritance Tax (IHT) in the UK in the 2024/25 tax year.
This is the fourth consecutive year of record IHT payments, and the £8.2 billion figure is a 10% increase on the previous year.
The key reasons cited for the escalating receipts are the freezing of the IHT nil-rate band at £325,000 since 2009, and the ongoing rise in property values.
With the Professional Adviser report suggesting that IHT will continue to bring in more for the treasury in the coming years, especially with pensions becoming liable for IHT from April 2027, it’s important to get your estate planning arrangements in order.
Read on to find out why, and how gifting could help.
Inheritance Tax is only chargeable on the value of your assets above the nil-rate bands
In the UK your estate will be liable for IHT at 40% on the value of your assets in excess of your nil-rate band.
You may also have an additional nil-rate amount on the value of your main residence if you leave it to your children or grandchildren. In 2025/26, this is up to £175,000.
If your spouse or civil partner pre-deceases you, their nil-rate allowances will automatically pass to you. In these circumstances, IHT will only be chargeable on the value of your estate in excess of up to £1 million.
There are various measures you can make use of to reduce your IHT liability. One of the most common and straightforward of these is to gift assets during your lifetime.
Here are five effective gifting options that can help you manage your IHT liability in the UK.
1. Use various exemptions to make a series of lifetime gifts
There are various gift exemptions you can make use to immediately reduce the value of your estate for IHT purposes.
Annual exemption
You can gift up to your annual exemption each year without incurring any IHT liability. This stands at £3,000 in 2025/26. This exemption can also be carried forward for one year, meaning you can gift up to £6,000 this tax year if you didn’t use the exemption last year.
Remember that this exemption applies to all individuals, so you and your partner could potentially immediately use this facility to reduce the combined value of your estate by £12,000.
Wedding gifts
Each tax year, you can give a tax-free gift to someone who is getting married or starting a civil partnership.
You can gift up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to any other person.
Small gifts exemption
You can also gift up to £250 to as many different individuals as you like each year, with the proviso that you haven’t used another exemption on the same individual.
2. Potentially exempt transfers
Beyond the exemptions you read about above, any other gifts for any amount that you make are treated as “potentially exempt transfers” (PETs).
This means that they will not be liable for IHT if you survive for seven years from the date you make the gift, often referred to as the “seven-year rule.”
Under this rule, a system of taper relief applies so the amount of IHT payable reduces between years three and seven.
Taper relief only applies to gifts in excess of your nil-rate band.
It’s good financial practice to keep a note of all gifts you make, as having this information to hand will be helpful to your executors and family after your death, when the IHT liability on your estate will be assessed.
3. Making gifts out of your surplus income
A valuable option when it comes to using gifts to reduce your IHT liability is to use the “gifts out of surplus income” facility.
Yet, according to FTAdviser, in the three years up to the end of April 2025, fewer than 1,500 estates have made use of this option, which equates to less than 2% of the estates with an IHT liability.
Importantly, there is no limit to the amount of the gifts you can make in this way, so using them effectively can be very effective as part of your estate planning.
Furthermore, as long as you can establish a pattern of gifting in this way, the amounts do not have to be the same.
For example, such a pattern could include regular gifts on family birthdays, or the payment of school fees for your grandchildren.
However, there are three important rules to bear in mind:
- The gifts must demonstrably come from your income rather than your savings or investments.
- Although the amounts can vary, the gifts must be regular and create an established pattern.
- The gifts you make must not affect the quality of your lifestyle.
As with PETs, it’s important to keep accurate records of the gifts you make.
4. Using trusts to gift your assets
By putting assets in trust, you no longer have full control over them. Because of this, they will not be considered as part of your estate when your IHT liability is calculated, and so using trusts can be an effective estate planning option.
However, a common misconception is that assets in trust are exempt from IHT, and it’s important to be aware that this is not necessarily the case. In fact, assets in trust could be liable for other taxes as well.
For example:
- The gifted amount in trust will only be exempt from the 40% IHT rate after seven years.
- There will be an immediate IHT liability of 20% if the amount in trust exceeds your nil-rate band.
- Trusts are revalued every 10 years, and there will usually be a charge of 6% on the value that exceeds the nil-rate band.
- Exit charges of 6%, based on the most recent valuation, are likely to be applied when the trust is closed or assets are withdrawn.
Selecting the type of trust that suits your needs can be complicated so it might be helpful to speak to a financial planner.
5. Making gifts to charities
Another effective way to reduce the value of your estate is through gifting to charity.
Any gifts you make to registered charities are immediately exempt from IHT.
Moreover, if you leave at least 10% of your estate to charity when you die, the IHT rate on the remaining estate is reduced from 40% to 36%.
Get in touch
If you would like to talk about your own estate planning arrangements and reducing your IHT liability, please get in touch with us.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only, it does not take into account your personal objectives, financial situation, or needs. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
The FCA does not regulate estate planning or tax planning.
All contents are based on our understanding of HMRC legislation, which is subject to change.