Inheritance Tax Gifting Rules
- MAZ
- Oct 1
- 26 min read
Foundations: Thresholds, Gifts & Exemptions You Must Get Right
What You’re Trying to Know (User Intent)
Picture this: you’re wondering “if I give away some of my assets during my lifetime, will I still have to pay Inheritance Tax (IHT)? How much? When? What if I die sooner than I expect?” You also want to check whether your estate will push you over the IHT threshold, whether your gifting strategy is safe, and whether you’re inadvertently causing a bigger tax bill for your loved ones. And, if you run a business or have different income sources (job, rental, freelance), you want to know how that changes things.
So in this first section we’ll cover:
● The current nil-rate bands, residence nil-rate band, thresholds as of 2025/26.
● How HMRC treats lifetime gifts (Potentially Exempt Transfers, etc.).
● The principal exemptions and rules: annual exemption, small gifts, wedding gifts, gifts from surplus income.
● Case studies and real situations I’ve seen where people got caught out.
1. Current IHT Rates and Thresholds (2025/26)
First off, you need the up-to-date numbers. These are what I use in client work, verified from HMRC.
Element | Amount in 2025/26 Tax Year | Key Notes |
Nil-Rate Band (NRB) | £325,000 per individual estate. | |
Residence Nil-Rate Band (RNRB) | £175,000 when a qualifying residence is left to direct descendants (children, stepchildren, grandchildren) | |
Taper threshold for RNRB | Estates valued over £2 million begin to lose the RNRB gradually (taper) | |
Nil-Rate + Residence Combined | For many people, this means up to £500,000 tax-free (NRB + RNRB), if conditions are met. For married couples / civil partners, you can combine unused bands, potentially up to £1 million between two people. | |
Standard IHT rate | 40% on the portion of the estate above the available nil bands. | |
Reduced rate | 36% if 10% or more of the net value of the estate is left to charity in the will. |
These thresholds are fixed (frozen) until at least 2027-28: that’s important because inflation is pushing many estates over these bands.
2. What Counts as a “Gift” & Types of Gifts
To plan, you must know what HMRC will treat as a gift, even when you think you’ve “given it away”.
What HMRC counts as a gift
● Money: transfers of cash or bank balances.
● Assets: property, land, shares (both listed and unlisted under certain conditions), personal goods (antiques, jewellery).
● Discounted or undervalued transfers: e.g., selling property to a child for less than market value, gifting part of your home but still living there. These can be classed as gifts (or “gifts with reservation of benefit”) and might be pulled back into the estate.
Potentially Exempt Transfer (PET)
● A gift of any value (from you to someone else) qualifies as a PET: it is potentially exempt from IHT if you survive for 7 years after making it.
● If you die within that 7-year span, the gift may be taxed, often via taper relief depending on how many years have passed.
Gifts with Reservation of Benefit (GWR)
● Be careful: if you gift something but still benefit from it, HMRC may say it never left your estate for IHT purposes. Common with houses: gifting the legal title but continuing to live in it means GWR rules may apply.
3. Key Exemptions & Allowances Lifetime Gifts
Below are the main ways you can safely gift without creating an IHT problem—what to use, when, and common traps.
Exemption / Allowance | What It Allows | Conditions / Limitations | Pitfalls to Watch |
Annual Exemption | Give away up to £3,000 per tax year free of IHT. Can be used in full for one recipient or split across several. Unused portion can be carried forward one year. GOV.UK | If you die within 7 years, these gifts don’t count towards the PET subject to NRB/RNRB limits. Use early in the tax year or before death to get full use. | Many forget to carry forward. Or wrongly believe they can give more simply because they have assets. Also, gifted amounts too close to death might still be scrutinised even if under exemption limits, especially for non-cash gifts. |
Small Gifts Exemption | Gifts up to £250 per person per tax year without using the annual exemption. | If you give someone else any part of your £3,000 annual exemption, you can’t also use the £250 small gifts exemption for the same person in that tax year. | People mix up who got what; keeping records is vital. |
Wedding / Civil Partnership Gifts | Tax-free gifts for a marriage or civil partnership: £5,000 for a child; £2,500 for a grandchild or great-grandchild; £1,000 for anyone else. GOV.UK | Only once (or limited events), not repeatable like annual gifts. If you’ve used your annual exemption or small gift with the same person, those counts matter. | Sometimes duplicates: e.g. parents give part wedding gift, plus separate gifts; confusion over dates leads to exceeding limit. |
Normal Expenditure Out of Surplus Income (“Income gifts”) | Allows regular gifts made from surplus income to be immediately exempt from IHT (not just PETs) if certain conditions met. No need to survive 7 years for those gifts, since they are outside the estate if criteria satisfied. Royal London for advisers. | Conditions include that the gifts are part of your normal, regular expenditure, that they are made out of income, not capital, and that you retain enough income to maintain your standard of living. Also you should have a pattern (often over 3-4 years) or commitment; good record keeping essential. mercerhole.co.uk+1 | This is under-used. Many clients think “I’ll use savings” but then it’s capital, and not income gifts. Or they don’t maintain records, or they reduce lifestyle unknowingly. If HMRC challenges, lack of evidence can mean gifts get pulled into estate. |
4. The 7-Year Rule & Taper Relief: How Much Time Matters
This is a major area where people get tripped up. I’ve helped clients who made large gifts to children thinking “I’ll die in 10 years” only to die in 4, and suddenly there’s a big IHT bill because they didn’t properly use exemptions or taper.
The timeline
● 0-3 years before death → gifts made in this period (if PET) are taxed at full 40% IHT rate on the value above allowances.
● 3-4 years → 32%
● 4-5 years → 24%
● 5-6 years → 16%
● 6-7 years → 8%
● 7+ years → 0% (gift is out of estate; no IHT) provided no reservation of benefit etc.
Real-world example
Case: Mrs Singh in West Yorkshire She gifted £200,000 to her son in 2020. In 2023 she gifts another £100,000 to her daughter. Then she dies in late 2025.
● The 2020 gift is now 5 years and some months old → so under the 5-6 year bracket. If it’s above her unused nil-rate band etc, that gift could be taxed at 16% (of what is above the threshold) for IHT.
● The 2023 gift is within 0-3 years → taxed at 40% if that gift pushes the estate + total gifts in 7 years above thresholds. She had used annual exemption where possible; residual nil-rate band will reduce accordingly.
Why Taper Relief Only Kicks In After 3 Years
Because first 3 years after a PET gift, the full rate applies. Only after that does taper reduce how much of the gift is taxed if you die. That means gifts made in years 4, 5, 6, 7 get progressively lower exposure if you die within those windows. But the values of ALL PET gifts are added up alongside the rest of your estate when you die, to see how much is above the nil bands. Exemptions earlier (annual, small, etc.) reduce the size of what's added.
5. New / Upcoming Changes to Watch (as of Mid-2025)
In my practice, being ahead of changes is crucial. Some reforms are already confirmed; others are under discussion. Being aware lets you plan before the rules tighten.
● Pensions into IHT from April 2027: Unused pension pots will be included in the estate for IHT purposes. That changes the basis of what “assets” count. The Guardian+1
● Possible reforms to gifting rules including the 7-year rule, lifetime caps on how much can be given in lifetime without IHT, and tightening of taper relief. These are under discussion. swgroup.com+1
● Frozen thresholds: Nil-rate band and residence band are fixed (not increasing with inflation) until at least 2027/28. So many estates that may previously have been safe are creeping into taxable territory due to rising asset values.
6. Common Errors I’ve Seen in Practice
These are from real clients, anonymised, but they show where people often believe they’ve done the right thing, but HMRC sees differently.
● Using annual exemption incorrectly: Client A thought transferring entire unused annual exemption from previous year (which had already been partly used or allocated) was possible for multiple recipients, but records were poor. We had to argue with HMRC years later.
● Misunderstanding “income gifts”: One client paid a lump sum from savings each year to grandchildren thinking it was “from income”. HMRC rejected part of this because portions came from capital (savings), not regular income, and donor’s expenditure record didn’t prove it was “surplus”.
● Gifts with reservation of benefit (GWR) mistakes: A retired gentleman transferred his house into his daughter’s name to avoid IHT, but continued living there rent-free. After he died, the house was brought back into his estate because of GWR. The family was surprised by the large tax bill (and legal fees) this generated.
● Poor timing with PETs / death: Someone set large gifts 4 years before expected retirement, expecting to die after 7 years; health issues intervened, so died in year 5. Because of that, gifts had not fully escaped PET risk; large taper relief owed to HMRC, plus interest and cost of delays.
● Overlooked overseas assets or foreign gifts: Estates with foreign property or assets (or gifts abroad) where valuation or legal ownership clouded caused undervaluation or non-disclosure, leading to investigations and penalties.
7. Worksheets & Checklist: Am I Safely Gifting?
To help you assess your situation, here’s a practical checklist you can walk through. Use this with numbers from your own records or get a meeting with your adviser.
Gift / Estate Planning Worksheet
List all assets
○ Property (main residence, other property) – current market value
○ Savings & investments (listed shares, unlisted, bonds)
○ Pension pots (note upcoming inclusion from 2027)
○ Business assets, agricultural, farmland if any
Total up liabilities
○ Mortgages, debts, funeral, professional fees
Calculate your estate’s net value = assets minus liabilities
Determine your nil rate band (NRB) = £325,000
Residence nil rate band (RNRB) = £175,000 if passing residence to direct descendants and estate under taper threshold (£2m)
Total gift allowances used / to be used
○ Annual exemption (current & prior year if carried over)
○ Small gifts per person
○ Wedding gifts limit
○ Regular gifts from income
List all PETs (gifts above allowances) in past 7 years: date, amount, recipient, nature (cash, property, etc.)
Check for gifts with reservation of benefit: do you still use the gift or benefit from it? If yes, note that.
Surplus income gifts:
○ Is there a regular pattern over past few years?
○ Can you show normal expenditure / budget / income left after gifts?
○ Do you retain sufficient income to maintain your standard of living?
Estimate timing: for PETs, how many years until gift is “safe” (i.e., more than 7 years)?
Review legal titles and ownership, especially for business or foreign assets – ensure clear documentation.
Simple Calculation Example
Let me run you through a worked example. I used this with a couple of clients recently.
Case: Michael & Saira, Self-Employed & Landlords Michael (aged 70) has:
• Main residence (market value £600,000, mortgage negligible)
• Rental property portfolio ≈ £400,000 net after mortgages
• Savings & investments £200,000
• Pension pot not yet drawdown ≈ £300,000 (note: not currently in estate but will be from 2027) Liabilities negligible besides small debts.
Step 1: Estate (excluding pension) ≈ £1.2m
Step 2: NRB £325,000 + RNRB £175,000 (assuming they leave home to children) = total £500,000 less taper? Their estate is under £2m, so full RNRB applies. So £500,000 tax-free.
Step 3: Excess = £700,000 would be taxed at 40% ≈ £280,000 IHT = current risk.
They then review gifts:
● Annual exemptions: both are using them (Michael gives £3,000; Saira the same).
● No PETs yet above large value.
● They start making regular annual payments from Michael’s self-employed earnings to grandchildren’s education – surplus income gifts, documented.
● Michael contemplates gifting part of rental property to children, but worried about losing income or causing GWR.
This shows even “middle wealth” estates are well into IHT exposure, especially with frozen thresholds.
8. Things to Double-Check: Scotland, Wales, and Other Jurisdictional Differences
Although IHT is largely UK-wide, in practice some differences or legal complications emerge depending on where you live or where assets are located.
● Scotland: Inheritance Tax is UK wide; the rules in Scotland for IHT are the same. What differs is land ownership, domicile law, legal titles, valuation practice. If you live in Scotland but own property in England (or vice versa), how you value and how ownership is registered matters. I’ve had clients in Edinburgh with rental properties in England where legal title differences caused delay in probate.
● Wales & Northern Ireland: Same as England in terms of thresholds & rules, though legal systems differ and local probate / legal fees vary. Always check local legal advice for estate administration.
● Domicile / Residence status: If you die domiciled outside the UK, or gifts are made to / from non-UK persons, international law, double tax treaties, and foreign jurisdictions might be involved. I’ve helped clients returning from overseas and discovered foreign assets were not properly declared or valued.
Applying Gifting Rules to Employees, the Self-Employed & Business Owners
Why Application Matters
None of us wants to get lost in technical definitions and exemptions, only to discover later that our own case doesn’t quite fit the rules. I’ve sat across the table from countless clients — a nurse in Manchester, a self-employed IT contractor in Bristol, a landlord in Birmingham — all of whom thought they’d structured gifts correctly. In practice, small details (whether the money came from income or capital, whether a gift was properly documented, or whether business assets qualified for relief) made the difference between no tax and a six-figure tax bill.
So in this section, I’ll break down how different taxpayers should apply the gifting rules in practice.
Employees: Using Surplus Income Wisely
Gifts Out of Income for PAYE Employees
If you’re on PAYE, perhaps in a stable salaried job, one of the most effective tools is the “normal expenditure out of income” exemption. Unlike PETs, these gifts are immediately outside your estate.
● What qualifies?
○ The gift must come from income (salary, pension income, investment income).
○ It must be regular and habitual — think monthly standing order to grandchildren, or annual school fee payments.
○ You must keep enough income to maintain your own lifestyle.
● What doesn’t qualify?
○ One-off lump sums from savings.
○ Sporadic, irregular payments without a clear pattern.
Case Study: PAYE Example
Case: Sarah, NHS Nurse in Manchester Salary: £45,000. Annual living costs: £30,000. Surplus income: £15,000. She sets up a standing order of £1,000/month to her daughter for childcare.
Because these payments come from surplus income, are regular, and leave Sarah enough to live on, they are immediately outside her estate — no 7-year PET clock, no IHT risk.
Mistake to avoid: Sarah’s colleague decided to gift £20,000 to her son for a house deposit, assuming the same rule applied. HMRC later deemed it a PET (because it came from savings), meaning if she dies within 7 years, it counts towards her estate.
Self-Employed Individuals: Irregular Income Pitfalls
Self-employment complicates things because income can be lumpy. HMRC will scrutinise whether a gift truly comes from surplus income rather than capital.
Things Self-Employed Should Do
Document earnings and expenditure annually. Keep a note of how much you retained for personal living expenses.
Show a pattern. For example, making annual ISA gifts to children each April, or monthly transfers, even if income varies.
Avoid drawing down savings and labelling them “income”. HMRC will check your accounts if challenged.
Case Study: IT Contractor in Bristol
Case: John, 52, freelance contractor, income fluctuating £60k–£120k/year. In 2022/23, he gifted £30k to his son for university costs. John thought this was a surplus income gift.
On review, most of that £30k came from cash he had retained from earlier years. HMRC treated it as a PET. John would need to survive 7 years for that to be exempt.
Professional tip: I advise self-employed clients to link gifts clearly to annual profit drawings, not retained savings. Better still, set up a regular gift (e.g. £500/month) aligned with your drawings — far easier to justify as “surplus income”.
Landlords & Side-Income Earners: Hidden Risks
Rental income counts as income for surplus gift rules, but many landlords trip up by using capital from property sales for gifts. That’s not income, and so it becomes a PET.
Real Scenario: Birmingham Landlord
Case: Mrs Khan sold one of her buy-to-let flats and gave £100,000 to her daughter in 2024. She thought this was covered as an income gift.
HMRC challenged — correctly. Sale proceeds are capital, not income. Result? It became a PET. If she dies before 2031, that gift may still be taxable.
Tip: Rental profits (after expenses) can be used for income gifts if regular and documented. But sales are capital disposals and treated differently.
Business Owners: Where Reliefs Change Everything
For business owners, there’s an extra layer: certain business assets may qualify for
Business Relief (BR), reducing or eliminating IHT altogether.
What Is Business Relief?
● 100% relief: For unlisted trading company shares, sole trader/partnership business assets.
● 50% relief: For certain controlling shareholdings in listed companies, or where you give away land/buildings used by the business.
● Conditions: Must generally own the asset for at least 2 years before death or gift.
Why Business Relief Matters for Gifting
If you gift qualifying business assets during your lifetime, they can fall under BR and be transferred with no immediate IHT charge. But watch: if business activity is “investment” rather than “trading” (e.g. property letting businesses), BR may not apply.
Case Study: Family Engineering Business
Case: Raj, 60, owns 80% of shares in a family engineering company. He gifts 20% of shares to his daughter in 2025. He dies in 2028.
● Because Raj held the shares for over 2 years, they qualified for 100% BR.
● That 20% transfer was outside IHT immediately, even though death was within 7 years.
● If Raj had instead owned a property investment company, the same gift might not qualify.
Contractors & IR35: Knock-On IHT Issues
Since the IR35 changes, I’ve seen more contractors inadvertently shift into higher PAYE-like taxation. That reduces disposable income and can limit what they can classify as surplus income gifts.
● PAYE through umbrella company = less surplus income, harder to sustain regular gifts.
● Own limited company (if truly outside IR35) = possible to use dividend income for income gifts.
● Caution: dividends must be properly declared, not just informal transfers.
Rare Situations: Emergency Tax & Child Benefit Clawbacks
These aren’t directly IHT issues, but they affect how much “surplus income” you really have, which in turn determines if gifts qualify.
● Emergency Tax Codes: I’ve seen PAYE employees suddenly over-taxed for a few months, believing they had “surplus income” for gifts. Later, HMRC refunds meant the gifts actually exceeded their true surplus income. That’s risky if challenged.
● High Income Child Benefit Charge (HICBC): If your income tips above £50,000, part of your “income” is clawed back by HMRC. If you’ve already gifted based on gross income, HMRC may argue you didn’t have the real surplus to sustain gifts.
Step-by-Step: Checking If Your Gift Counts
Here’s a process I use with clients to avoid misclassifying gifts.
Was the gift from income or capital?
○ Salary, pension, rental income = income.
○ Sale proceeds, savings = capital.
Is the gift regular?
○ Standing order, annual tradition, repeated pattern = good.
○ One-off, ad-hoc = PET.
Did you retain enough income for yourself?
○ Budget test: income – expenses – gifts = still leaves you comfortable.
Have you documented it?
○ Keep records: bank transfers, letters stating intention, spreadsheets showing income vs. gifts.
Do assets qualify for special reliefs?
○ Business assets: check BR eligibility.
○ Agricultural assets: check Agricultural Relief (AR) conditions.
Example Calculation: PAYE vs. Self-Employed vs. Business Owner
Scenario | Income | Gift | Treatment | Outcome if donor dies within 5 years |
PAYE employee on £60k, gifts £500/month from salary | £60k salary, £40k expenses | £6k/year gift | Surplus income gift | Immediately outside estate, no IHT |
Self-employed consultant, £80k average profit, gifts £20k lump sum | £80k income (but irregular), £50k expenses | £20k gift (1-off) | PET | Counts towards estate if death within 7 years; taper relief after 3 years |
Business owner with trading company, gifts 10% shares worth £200k | Dividends £40k, business value £2m | Gift of shares | BR 100% | Fully exempt, even if death occurs within 7 years |
Practical Red Flags I Flag for Clients
● Living in gifted property rent-free: This is the classic “gift with reservation”. HMRC almost always claws it back.
● Large ad-hoc gifts labelled “from income”: Without paperwork, HMRC assumes PET.
● Mixing capital and income gifts in same transfer: Dangerous if challenged.
● Ignoring pensions: Pre-2027, pensions sit outside estates; post-2027, they’re in. Big change.
● Not updating wills when gifting shares/business assets: Causes legal tangles.
Advanced Inheritance Tax Planning with Gifting
1. Using Trusts for Gifting
Trusts are one of the most powerful — but also most misunderstood — tools in IHT planning.
a) Bare Trusts
● Simple structure: assets belong to the beneficiary outright.
● Gifts into a bare trust are PETs.
● Used mainly for children (e.g. investing savings until age 18).
Example: A grandparent gifts £50,000 into a bare trust for a grandchild. If the grandparent survives 7 years, it falls outside their estate.
b) Discretionary Trusts
● Gifts into discretionary trusts are Chargeable Lifetime Transfers (CLTs), not PETs.
● If value > £325,000 (NRB), there may be an immediate 20% IHT charge.
● Trust can distribute assets flexibly among beneficiaries.
● Useful when beneficiaries’ circumstances change (e.g. divorce, bankruptcy).
Case Study:
Mr Green gifts £400,000 into a discretionary trust in 2025. The first £325,000 falls within NRB. The excess £75,000 is charged at 20% (£15,000).
If he dies within 7 years, the £400,000 is revisited, but credit is given for tax already paid.
c) Interest in Possession Trusts
● Beneficiary has the right to income, but capital remains protected.
● Often used for family homes, giving a surviving spouse income but preserving capital for children.
2. Overseas Gifting & Cross-Border IHT
With global mobility, many UK taxpayers now have overseas assets or children abroad.
This is a hotspot for errors.
● UK Domicile = Worldwide IHT If you’re UK-domiciled, your estate (including overseas assets) is taxed under IHT rules.
● Non-UK Domicile = UK assets only If you’re non-domiciled but resident, only UK assets fall within IHT.
● Double Tax Treaties exist with some countries to prevent double IHT charges.
Example:
A UK-domiciled father gifts €300,000 to his son in Spain. Spanish “gift tax” applies immediately, and UK IHT rules may also apply. Without planning, double taxation is possible.
Tip: Always check both countries’ rules before gifting across borders. A deed of gift translated into the local language can be essential.
3. Pensions and IHT – The 2027 Gamechanger
Until 2027, pensions sit largely outside the IHT estate. After April 2027, the government is set to bring certain defined contribution pensions into the IHT net.
● Current position (2025):
○ If you die before 75: pension funds can usually be passed tax-free.
○ If you die after 75: beneficiaries pay income tax, but no IHT.
● Planned 2027 reform:
○ Pension pots may be subject to IHT at death.
○ This makes gifting into pensions less attractive as an estate planning tool.
Planning tip (2025/26 window): Maximise pension contributions now while they still benefit from IHT protection.
4. Combining Reliefs: Agricultural & Business Relief
Advanced planning often involves layering exemptions.
● Agricultural Relief (AR): Up to 100% relief on farmland, farmhouses, and working farms.
● Business Relief (BR): 50% or 100% relief on qualifying business assets.
Example – Combined Relief:
A farmer gifts farmland worth £2m to his son. Agricultural Relief = 100%. If he also runs a trading farm business, additional BR may apply to equipment or shares.
This means multi-million-pound transfers can sometimes pass with no IHT liability.
5. Gifting with Reservation of Benefit (GROB) – Still the #1 Trap
The most common pitfall I see in practice: gifting assets but continuing to enjoy them.
● Example: Giving your house to children but still living there rent-free.
● HMRC will treat it as if you never gifted it — full value pulled back into your estate.
Avoiding the trap:
● Pay market rent to children after gifting property.
● Or structure the arrangement via trust (complex, but possible).
6. Record-Keeping Strategies
HMRC investigations often succeed not because the rules are misunderstood, but because there’s no evidence that gifts met the conditions.
Here’s what I recommend clients keep:
Gift register: Spreadsheet noting date, amount, recipient, and whether it was income or capital.
Letters of intent: Simple letters to confirm regular gifts were intended as “out of income”.
Bank statements: Highlight transfers and link to income received.
Annual estate summary: A one-page summary of assets, liabilities, and gifts given.
Tip: I’ve had HMRC enquiries collapse simply because my client had clear documentation — while others, with no paperwork, lost exemptions worth £100,000+.
7. Putting It All Together – Advanced Example
Case Study: The Patel Family, North London Estate: £4.5m (house £2m, shares in trading business £1.5m, pension £500k, cash £500k).
Strategy:
● Gift £6k/year (couple’s annual exemptions) to grandchildren.
● Use regular gifts out of income (£20k/year from surplus dividends).
● Transfer £1m of trading company shares to children – covered by 100% Business
Relief.
● Ensure farmland gifted to nephew is covered by Agricultural Relief.
● Retain pensions (for now, outside estate).
● Document everything in an annual “gifting letter”.
Outcome: On death, estate reduced by nearly £2m through planned, exempt gifting. IHT liability cut by over £700,000.
8. Key Takeaways (Numbered)
Trusts can shield wealth but come with upfront tax risks (CLTs).
UK domicile rules mean worldwide assets may face IHT.
Pension planning is a ticking clock – 2027 reforms may remove their IHT shelter.
Business & Agricultural Reliefs allow large estates to transfer tax-free if conditions met.
Gifts with reservation (e.g. gifting a house but still living in it rent-free) almost always fail.
Good record-keeping is often the deciding factor in winning or losing an HMRC challenge.
Combining multiple reliefs with careful planning can save millions in tax.
Each taxpayer type (employee, self-employed, landlord, contractor, business owner) has unique gifting pitfalls — tailor your strategy accordingly.
Always seek professional advice when gifts exceed allowances or involve property/business assets.
Early action (before 2027 pension reforms) is the single best way to preserve wealth for your heirs.
A FREE Learner's Guide for Inheritance Tax Gifting Rules
FAQs
Q1: Can someone making large one-off gifts (say £100,000) from a business pay out treat part of that as “normal expenditure out of income”?
A1: Well, it’s rare that a large lump gift qualifies as a “normal expenditure” gift, but it can if you can demonstrate that gift is part of an ongoing pattern. For a business owner, that means previous years’ dividends or profit drawings have been used similarly (smaller sums, regular amounts), and that you expect to continue. Also you need that after making the gift, your income (after business costs, tax, personal outgoings) still leaves you enough to maintain your usual standard of living. If you can’t show those, HMRC will treat the whole gift as a PET – fully exposed under the 7-year rule.
Q2: What if someone has two jobs (PAYE + freelancing) — how do mixed incomes affect “surplus income” for gifts?
A2: In my experience, this is a common sticking point. You need to aggregate all income sources (PAYE, freelancing, rental, dividends etc.), subtract all your personal living expenses and business costs, and see what’s left. If the freelancing income is irregular, you’ll often average over a few years to show stable pattern. The crucial bit is that HMRC expects consistent “surplus income over time” — you can’t rely just on a one-good year. If, after deducting everything (your mortgage, council tax, usual travel, utilities, subscriptions etc.), you still have spare income, then gifts out of that spare income may qualify under the “normal expenditure out of income” exemption.
Q3: Does living in Scotland or Wales change how inheritance tax on gifts works?
A3: For gifting and IHT rules themselves, no major differences — the UK rules apply across England, Wales, Scotland and Northern Ireland. However, differences often crop up in practice: valuation rules for property may differ; legal title practices; whether trusts are more or less expensive to administer; cost of probate; and local property market inflation can push estates into taxable bands more quickly. If you live in Scotland, for instance, and your property titles are different, documentation of ownership matters more. Also cross-border assets (property in England vs Scotland) can complicate proving gifts left the donor’s estate.
Q4: What happens to a gift if the donor dies unexpectedly within the first year? How is tax calculated in that case?
A4: If the donor dies within the first 3 years after making a gift (that is a PET), the full 40% IHT rate applies to the part of the gift (together with other lifetime transfers) above their available nil-rate bands. No taper relief yet. Also, annual exemptions and other allowances still reduce what counts (if used correctly). In practice, executors will need to total up all PETs made in the 7 years before death, apply exemptions, then apply full rate for gifts in the 0-3 year bracket.
Q5: Can someone use the annual £3,000 exemption in one year, then carry it forward, and also use small gifts or wedding gifts to the same recipient in that same tax year?
A5: Yes, but with restrictions. The £3,000 annual exemption is per donor per tax year. You can’t double-up for the same recipient using both annual exemption and small gift exemption: if you’ve used your annual exemption on a recipient, you can’t then also use the £250 small gifts exemption for that same person in that same year. Wedding gifts are separate allowances, so a wedding gift to a child (up to £5,000) could be used in same year plus annual exemption, so long as other conditions are met. But careful: all such gifts need to be properly documented to avoid confusion.
Q6: If someone has foreign assets or gives a gift overseas, does that affect UK IHT gifting rules?
A6: Yes, it can. If the donor is UK-domiciled, worldwide assets (including foreign property, foreign bank accounts, foreign gifts) are subject to UK IHT. That means if you give something overseas, or own something overseas, it's counted. If non-domiciled, then rules may differ: foreign assets might not be under IHT in same way, depending on domicile and treaty arrangements. Also, valuation of foreign assets, proof of title, exchange rates, legal recognition of the gift overseas—these can become complicated. I’ve had cases where lack of proof of ownership abroad delayed probate and created disputes. Always get local legal advice when dealing with assets outside the UK.
Q7: How are gifts of company shares handled, especially when someone owns a private business and wants to gift shares?
A7: Shares in a trading company can qualify for Business Relief, but there are conditions: generally you must have owned them for at least 2 years before the gift or your death, the business must be genuinely trading (not just investment property, for example), and the shares must be of a type that qualifies (unlisted, etc.). When you gift shares that qualify for 100% Business Relief, they can pass outside IHT even if you die soon after. But documentation matters: articles, shareholder agreements, valuation reports. If someone gifts shares in a business that’s part trading, part property investment, parts may get relief and parts not; mixed-use is a common trap.
Q8: What about gifts of property when the donor continues to live in it rent-free or with some benefit?
A8: That’s known as a gift with reservation of benefit. In short: even though you might have legally transferred the property (or part of it), if you continue to derive benefit (e.g. living there without rent, using it like before), HMRC can treat it as though you never gave it away — bringing it back into your estate for IHT. One of the biggest pitfalls I’ve seen: people gift their house to children to save IHT but continue living there. Unless rent is paid at market value or similar, GWR likely applies.
Q9: Can gifts from trusts count against gifting rules, or be used to reduce IHT liability?
A9: Yes, but with nuances. Gifts made via bare trusts may be treated as PETs; some trust structures may be chargeable lifetime transfers (CLTs) rather than simply gifts. Also many trusts are not exempt just because they’re trusts. If assets are moved into trusts, or gifts made to trustees for beneficiaries, you must check whether the trust qualifies for relief (e.g., Business Relief) or whether the transfer is a PET or CLT. Executors need to account for these under IHT / trust rules. Often, beneficiaries think “gift to trust = safe”, but trust type, terms, timing all matter.
Q10: If someone uses their surplus income gifts for regular expenses (like school fees or rent for a dependent), is there a risk HMRC says those are not “normal expenditure”?
A10: Definitely a risk, but it's manageable. The key is consistency and documentation. If, for instance, you’ve been helping pay grandchild’s school fees every September for 3-4 years in similar amounts, that builds a pattern, which helps satisfy HMRC the expense is part of your normal expenditure. But if one year you pay a large lump sum (because prices jumped) without prior pattern, HMRC may question whether that is “normal”. Similarly, large irregular expenses (major house renovation, or unexpected medical costs) are more likely to be excluded from “normal expenditure”. Keep receipts, bank statements, notes about what is regular vs exception.
Q11: What about income-producing gifts (e.g. giving shares that pay dividends)? Who pays the tax on the income, and does this affect IHT?
A11: In my own work I’ve seen this mix-up often. When you gift shares, the recipient becomes the owner and the income (e.g. dividends) from then onwards is theirs; they are responsible for any Income Tax due. But that doesn’t directly affect the donor’s IHT calculation except insofar as the value of those shares at time of gift counts toward PET / IHT bands. Also, if the shares were producing income before the gift, and the donor retained benefit (e.g. still got dividends), it might be treated as GWR. So just check: from what date recipient gets income, are any dividends paid, what was the value at gifting, etc.
Q12: Can pension contributions on behalf of family members be used to reduce IHT via gifts?
A12: This is tricky. Normally pension contributions are separate from IHT gifting rules. Paying someone’s pension contribution (if allowed in law) might be seen as a gift, but whether it qualifies under “normal expenditure out of income” depends on whether you, the donor, meet the conditions: regularity, enough income, etc. More often, people use sponsored pensions contributions as part of broader relief strategies, but I’ve seen HMRC reject attempts to treat a large one-off pension contribution to a family member as an IHT-free gift if not supported by pattern or if made too close to death. Always check legal limits, whether recipient’s pension scheme allows third-party contributions, and whether it aligns with your pattern of giving.
Q13: If someone has made gifts in years with “poor income” (say freelancing slump), can they still use “normal expenditure out of income” in better years?
A13: Yes, but with caution. HMRC looks “one year with another” over a period (often 3-4 years) to see whether your pattern of gifts is consistent and whether income is sufficient. If you had a slump, you’ll want to show that was an outlier; that in other years your surplus income was sufficient. It can also help to pro-rata gifts (smaller in lean years, larger in good years) rather than a fixed large gift. Documenting your income and outgoings across those years is essential.
Q14: How do executors / beneficiaries challenge under-reporting of gifting if they suspect pet gifts weren’t declared?
A14: Executors have a legal duty to disclose lifetime gifts when preparing the IHT return. If a beneficiary suspects something was missed, they or the executor can request all bank statements, records of assets, share transfers etc. HMRC requires forms like IHT403 (gifts and transfers of value) to be filled out showing gifts in the last 7 years. In practice, if someone omitted large gifts, HMRC may raise enquiries, demand valuations, and impose penalties or interest if under-reporting is found. Beneficiaries acting early (as soon as death is known) often help avoid delays and limit extra cost.
Q15: If someone transfers property into joint names (e.g. with their child), is that automatically a gift? How is the value counted?
A15: Transferring property to joint names can be a gift. The value counted depends on how ownership is split, and whether there’s consideration (did the recipient pay anything?). If you gift 50% of a property to a child, for example, that 50% is a gift for IHT purposes. If after gift, the donor still lives in it or benefits in some way, Gift with Reservation of Benefit rules may apply to that portion. Also, valuation at date of transfer matters; market value, legal title, mortgage share, etc. So it isn’t “automatic safe”, you need proper valuation/documentation.
Q16: What if someone gives a gift but later needs to reverse or reclaim it (for example, gift was made in error or donor needs capital back)? How does that affect IHT?
A16: Once a gift is made and legally owned by recipient, reversing it may be complicated. If you can show the gift was conditional or that recipient agrees to transfer it back, then the reversal might be possible — but often at legal/administrative cost, maybe capital gains, and IHT implications depending on timing. If reversal happens within 7 years and the original gift was a PET, the reversed value may still count. In practice, mistaken gifts are messy; always get legal advice if contemplating this.
Q17: Does the upcoming inclusion of pension pots in IHT (from 2027) change how someone should plan gifts now?
A17: Yes, it does. People with large defined contribution pension pots should be aware their unspent pension will likely be included in their estate from 2027. That means gifting strategies that ignore pension value may lead to underestimating IHT risk. In my experience advising clients, we’re often recommending accelerating some giving now (while pensions are still excluded), using surplus income gifts, business reliefs, etc., to reduce the taxable estate ahead of those reforms. But always balance that with your own need for income in retirement.
Q18: In case of divorce or separation, how do gifts made while married count? Are they treated differently?
A18: Gifts made while married or in a civil partnership to your spouse are generally exempt from IHT. But once separated (especially if divorced legally), that exemption can vanish or be limited. If you gift to ex-spouse or former partner, those gifts may be treated as to non-spouse recipients (i.e. subject to the usual PET / exemption rules). Also, gifts made before separation but with ongoing benefit can lead to disputes. I’ve helped clients where property was gifted to a spouse, then divorce led to splitting, and later death triggered IHT on parts due to changed status. Always review your will and gifting plans if your marital status changes.
About the Author
Maz Zaheer, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants, two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Tax Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible content. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
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