Gifting money is one of the most effective ways to reduce your estate for inheritance tax purposes — but it needs to be done thoughtfully. Done well, a gifting strategy can save your family tens of thousands of pounds in tax. Done poorly, it can create problems you did not anticipate. Here are the best practices to follow.
1. Use Your Annual Exemption Every Year
Every individual has an annual exemption of £3,000 per tax year. This can be given to one person or split between several. If you did not use last year's allowance, you can carry it forward once — giving up to £6,000 in a single year. Many people overlook this simple, no-risk exemption. Used consistently over many years, it can remove a significant sum from your estate.
2. Start Gifting Early
The 7-year rule means that larger gifts only become fully exempt from inheritance tax if you survive 7 years after making them. The earlier you start gifting, the more likely those gifts are to fall outside your estate. Waiting until you are seriously ill is too late — the gifts will almost certainly be caught by the 7-year rule.
3. Keep Detailed Records
Your executors will need to account for all gifts made in the 7 years before your death on the IHT return. Without records, gifts may be missed or incorrectly valued. Keep a simple log: the date, amount, recipient, and the source of the funds. This takes minutes to maintain and can save your family significant time and cost after your death.
4. Do Not Give Away More Than You Can Afford
This sounds obvious, but it is a common mistake. People give away money to reduce their estate, then find they need it for care costs in later life. Before making any significant gift, consider your likely future needs — including the possibility of long-term care. Local authorities can look back at gifts when assessing care funding eligibility.
5. Consider a Trust for Larger Gifts
If you want to make a larger gift but are concerned about how the money will be used — or want to protect it from the recipient's divorce or bankruptcy — a trust may be the answer. A discretionary trust gives trustees the flexibility to decide when and how the money is distributed. A bare trust is simpler and cheaper but gives the beneficiary absolute entitlement at 18.
6. Use the Normal Expenditure Out of Income Exemption
If you have surplus income — income you do not need for your normal living costs — you can give it away regularly and it will be fully exempt from IHT with no upper limit. This exemption is underused because it requires evidence of a regular pattern of giving from income. Set up a standing order and keep records from the outset.
7. Treat Children Fairly — or Explain Why You Have Not
Unequal gifts between children are a common source of family disputes. If you intend to give more to one child than another — perhaps because one has greater need — consider writing a letter of wishes explaining your reasoning. It is not legally binding, but it can prevent misunderstandings and resentment after your death.
Gifting is most effective as part of a broader estate plan — not as a standalone decision. We recommend reviewing your will, any trusts, and your gifting strategy together to make sure they work in harmony.