Without careful planning, Inheritance Tax (IHT) could take a sizeable chunk from the legacy you leave to your family and loved ones.

Between April 2025 and March 2026, HMRC collected £8.5 billion in IHT – £0.2 billion higher than the same period last year.

Frozen thresholds and rising asset values mean more families could become liable to the unpopular “death tax” in the coming years.

Add to this the fact that unused pension savings are also set to fall within the scope of IHT from April 2027, and there’s little wonder more people are choosing to gift wealth during their lifetime to reduce the size of their estate.

Inheritance Tax is charged on estates valued above £325,000

In the 2026/27 tax year, IHT is charged at 40% on any portion of your estate that exceeds the nil-rate band threshold, which has remained static at £325,000 since April 2009.

On top of this, there’s a residence nil-rate band, which has been £175,000 since April 2021. This applies to the value of your main residence, as long as you pass it on to your children or grandchildren on your death.

Together, these thresholds allow you to pass up to £500,000 to beneficiaries tax-free.

If you’re married or in a civil partnership, the value of your estate on the death of either one of you will typically pass to the surviving partner free of IHT.

Since you can also generally use each other’s unused allowance in the future, working as a couple may mean you could leave up to £1 million without paying IHT (in the 2026/27 tax year).

Gifting allowances that could help you to reduce the size of your estate during your lifetime

From small cash gifts to generous lump sums, there is a range of ways you could gift your wealth to your family and loved ones.

Every individual has an annual exemption, allowing you to gift £3,000 each tax year without triggering an IHT charge. It’s also possible to carry forward any unused annual exemption to the next tax year, though you can only go back one year.

Here’s a brief summary of additional gifting options:

• Wedding gifts: Rules depend on your relationship to those getting married or starting a civil partnership. Parents and stepparents can give up to £5,000 tax-free. Grandparents can give up to £2,500. Others can give up to £1,000.
• Small gifts: Give as many gifts up to £250 as you like – though you can’t use this for anyone who’s already benefited from another of your gifting allowances in the same year.
• Gifts from income: Regular gifts are exempt from IHT. To qualify, payments must be made on a regular basis, from income (not capital), without impacting your standard of living.
• Gifts to charities or political parties: Gifts to charities could reduce your IHT rate from 40% to 36%, provided you pass 10% of your net estate to charity.
• Birthday and Christmas gifts: Exempt from IHT as long as they are paid from your regular income.

Beyond these rules, you can, of course, gift away as much of your wealth as you’d like. Any sum exceeding the above allowances is treated as a potentially exempt transfer or “PET”.

Such gifts will only be charged IHT if you die within seven years of making the gift.

Where IHT is due, taper relief means that the rate charged will depend on how many years you survived after making the gift. The gift will only be taxed if the total value of gifts made in the seven years before you die exceeds the £325,000 tax-free threshold.

All this to say that while deciding to gift your wealth may be relatively simple, planning and executing those gifts tax-efficiently may not be quite so straightforward.

Planning and structuring gifts can make a big difference to efficiency

When you’re working as a couple, there are a variety of considerations that could play into how you gift your wealth to reduce the value of your estate.

Who is the best person to make the gift?

In the event that one of you has a larger taxable estate, it may be wisest for them to make gifts from their assets or income to help rebalance your estate and reduce a potential IHT charge.

Remember, if you’re married or in a civil partnership, there’s no IHT to pay on gifts you give to each other, as long as your partner lives in the UK.

Is one of you more likely to outlive the other?

Another thing to think about is your life expectancy. If one of you is more likely to die first, this may inform your decision-making – particularly in light of any PETs that you make.

Where one of you is significantly younger, or in better health, it may be prudent for them to give any gifts that exceed the normal allowance rules.

This may require gift-giving between the two of you before making the transfer to your intended recipient, and timing may matter.

As with so many things in life, the earlier you start planning, the better.

How are your assets held?

Whether assets are held in your own name, through a trust, or within a corporate structure will change the way they are assessed for IHT.

On top of this, some assets will be simpler to gift. For example, gifting cash savings is relatively simple, but if you’re selling investments to make a financial gift, timing the sale may be key, and the sale may create a Capital Gains Tax charge.

Keeping clear and accurate records can help you – and your future executors – keep track

Gifting to manage IHT can be a great way to ensure that more of your wealth stays with those you love most, but without accurate records, your work could be for nought.

It’s important to keep meticulous records – for yourself, your executors, and potentially for HMRC to verify the facts after your death.

Use a format that you’ll find easy to stay on top of. If you’re a fan of handwritten notes, keep a dedicated “gifts given” notebook. If you prefer digital records, keep a spreadsheet.

Regardless of the format, for each gift you make, record:

• The name of the recipient
• Your relationship with them
• The date you gave the gift
• How much you gave them
• How the transaction was made – cash, bank transfer, or cheque.

Every time you gift money, update your records. Plus, be sure to store your records somewhere safe and tell your executors where they can be found.

Get in touch

Taking steps to protect your estate from being eroded by IHT can be complex, but we’re here to help.

To speak to a financial planner, please email info@blueskyifas.co.uk or call us on 01189 876655.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

The Financial Conduct Authority does not regulate estate planning, trusts, or will writing.