Smart ways to pass on wealth tax-free

For generations, inheritance was something handed down after death. Now, amid rule changes meaning more might be taxable, more families are flipping the script.

Instead of waiting for probate and HMRC to take a slice of their hard-earned assets, they’re adopting a new approach: giving while living.

However, even some of that might be stopped soon with the Treasury reportedly looking at scrapping the seven-year rule – more on how you can still use it below – and setting a lifetime cap on how much can be given by people to their families before it is no longer exempt from tax.

One major factor behind this shift is the growing impact of inheritance tax (IHT). With the UK’s IHT threshold frozen at £325,000 since 2009 – despite soaring house prices and inflation – more estates are being dragged into the tax net.

Currently, anything above the threshold is taxed at 40 per cent, unless it qualifies for reliefs like the main residence nil-rate band or passes to a spouse or charity.

But the rules around gifting do offer some workarounds to pass on money during your lifetime without triggering a tax bill – if you plan properly.

According to HMRC, inheritance tax receipts hit a record £7.5bn in the 2023/24 tax year. That upward trend is likely to continue. Meanwhile, young adults are struggling with high living costs, unaffordable housing, and student debt.

For many parents and grandparents, the most obvious solution is to give financial help now, when it matters the most.

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“Making gifts to family while you are alive isn’t just about tax planning,” says Anthony Fuller, chartered financial planner at Path Financial.

“Giving money while you are alive also means you get to see your loved ones enjoy it, which can be very motivating.”

Thanks to the UK’s relatively generous gifting rules, there are legitimate ways to do this without incurring immediate tax consequences.

There are several exemptions that allow you to give away money or assets each year without incurring IHT:

Annual exemption: You can gift up to £3,000 each tax year free of IHT. This can be carried forward one year, meaning a couple could give £12,000 together if unused the previous year.

Small gifts exemption: You can give up to £250 per person, per year, to as many individuals as you like, provided they haven’t also received part of your £3,000 exemption.

Wedding gifts: Gifts made on marriage are exempt up to £5,000 for a child, £2,500 for a grandchild, or £1,000 to anyone else.

Normal expenditure out of income: Perhaps the most underused rule, this allows regular gifts from your surplus income – say, paying a grandchild’s school fees – without affecting your estate, as long as it doesn’t reduce your standard of living.

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There is more to know, however.

Larger gifts outside these exemptions fall under the “potentially exempt transfer” (PET) rules.

If you survive for seven years after making the gift, it falls outside your estate for IHT. Die within that window, and the gift may still be taxed, although taper relief can reduce the liability if you survive at least three years.

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“If the driver behind gifting is decreasing the inheritance tax bill of your estate, then gifting early gives you a much higher chance of achieving this,” says Fuller.

“You need to live for at least seven years from the date of the gift for it to be fully successful for inheritance tax planning. This is much more likely for a 60-year-old than an 80-year-old.”

As noted, this is potentially under review as part of a wider tax change.

Not all gifts are created equal. Giving away property or assets you still benefit from, like transferring a home but continuing to live in it rent-free, can trigger the “gift with reservation of benefit” rules. In those cases, HMRC may still count the asset in your estate.

Also, capital gains tax (CGT) may apply if you gift certain assets, such as shares or a second home, even if there’s no cash exchanged. It’s wise to get advice before gifting anything complex.

Fuller warns that generosity should never come at the expense of your own security.

“The first person you should look after in your financial plan is yourself – and that means keeping enough money to make sure you can afford to live your own life and pay for unexpected costs like replacing a car, roof or boiler.”

Whatever your strategy, documentation is essential. “It is important to keep a list of any gifts that you have made in your lifetime because they might need to be declared when you die as part of probate,” says Fuller.

“We suggest keeping a digital copy and printing out the latest version to leave with your will. Your executors should know where to find both.”

With proper planning and communication, your inheritance tax bill can therefore be significantly managed.

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.

Smart ways to pass on wealth tax-free

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