A warning has been issued over inheritance tax rules(Image: Getty Images/E+)People in the UK are being warned to tread carefully when gifting money to loved ones or risk leaving their estates facing unexpected inheritance tax (IHT) bills. While many believe that giving money to family or friends is tax-free, the rules are more complex than they appear.
According to HMRC, only certain types of gifts are immediately exempt from IHT. And failing to follow the correct process could mean those gifts are still liable for tax after you die.
Andy Wood, a tax expert at Tax Natives, says too many people are caught out by the misunderstanding that all gifts fall outside of inheritance tax. “There’s a common misconception that all gifts are automatically exempt from inheritance tax – but the reality is far more nuanced,” he explained.
“HMRC is clear – unless you follow the specific rules around surplus income, your generosity could come back to bite your estate later on.” One of the most effective ways to gift money without inheritance tax consequences is through HMRC’s “gifting out of surplus income” exemption. This allows individuals to give away unlimited amounts – but only if the gifts are made regularly, come from income (not savings or assets), and do not affect the donor’s standard of living.
“Gifts made from surplus income can be a powerful tool for inheritance tax planning,” says Andy, “but the key is evidence. You must be able to prove that the gifts are both regular and sustainable, and that they don’t compromise your standard of living.”
Experts recommend that anyone using this exemption keep detailed records of every gift, including the source of the funds and how often they are made. Andy warned: “People often overlook the need for proper record-keeping.
“If you’re gifting regularly to loved ones, it’s vital to document not only the amount and frequency, but also to show that the funds came from income – not capital. Without this, you risk the gifts being challenged by HMRC.”
For those making larger, one-off gifts – which fall outside the surplus income exemption – these are classed as Potentially Exempt Transfers (PETs). These gifts will only be fully exempt from inheritance tax if the giver survives for seven years after making the gift.
“For larger estates, gifting from surplus income can help reduce the inheritance tax bill significantly,” says Andy. “However, one-off gifts or those made without a clear pattern will fall under different rules – and could be taxable if you don’t survive seven years.”
With inheritance tax thresholds frozen and property values remaining high across much of the UK, more families are being caught in the IHT net – even when making well-intentioned financial gifts. “I’d strongly advise anyone considering substantial gifts to seek professional advice,” Andy added. “Inheritance tax rules are complex, and the cost of getting it wrong can be high – both financially and emotionally.”
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