Understanding gifting options: a guide

We've written extensively about the coming changes that will increase inheritance tax liabilities for many estates from April 2026 (read here) and April 2027 (read here). Gifting is a powerful estate planning tool, enabling you to transfer wealth during your lifetime while potentially reducing your inheritance tax exposure. With these changes on the horizon, it's more important than ever to consider your gifting strategy. This article explores key gifting options and their implications to help you make informed decisions. 

Outright gifts of cash or other assets

Outright gifts involve transferring cash or assets directly to the recipient. If you're in a position to do this, it can be rewarding to witness your family and friends benefit from your generosity during your lifetime.

Key considerations:

1. Review your finances. Any gift you make must be affordable for you in the long-term. You need to ensure you can comfortably maintain your standard of living, have enough for your retirement, a "rainy day", and care in the future should you need it.
2. Record the date of the gift. This is crucial for the "seven-year rule". If you survive seven years after making the gift, it becomes exempt from inheritance tax. For gifts exceeding the £325,000 nil rate band threshold for inheritance tax, taper relief will apply if you survive between three and seven years. Taper relief reduces the inheritance tax payable on the gift, with the reduction increasing the longer you survive beyond three years.
3. Avoid retaining benefit. If you continue to benefit from the gifted asset (e.g. living in a gifted property rent-free), it may be treated as a "gift with reservation of benefit" and still be included in your estate.
4. Plan for a potential inheritance tax liability. If you don't survive seven years, will the recipient of an outright gift be able to pay the inheritance tax due? Insurance can cover this risk and is worth considering.
5. If you are gifting an asset other than cash, it's important to consider the potential capital gains tax implications, as the transfer may trigger a taxable gain.

Gifts to trusts

Gifting to trusts can be an effective way to manage and protect assets, while potentially removing them from your estate. If the gift exceeds the £325,000 threshold, there will usually be a 20% immediate inheritance tax charge. 

The "seven-year rule" applies similarly to outright gifts but resets every seven years. If you gift £325,000 into a trust and survive seven years, you can make another gift of the same amount without triggering the 20% charge.

Gifts of certain agricultural and business property qualify for different reliefs. See our article on Agricultural and Business Property Relief reforms and the new £1 million allowance for more details.

Gifting out of excess income

This is often overlooked but is a good option for many. It allows you to make regular gifts from surplus income without incurring inheritance tax. It's ideal if your income consistently exceeds your living expenses, enabling you to support family while reducing your estate's taxable value.

It is very important to keep a note of your income, outgoings and the gifts you make to establish a pattern of regular gifting. Your personal representatives will need this when corresponding with HM Revenue & Customs after your death as they will need to evidence that the gifts were from excess income.

Annual gift allowance, small gift allowance and special one-off gifting opportunities

Everyone has an annual gift allowance of £3,000, which can be given away tax-free each tax year. You can also give as many gifts of up to £250 per person as you want each tax year (but you cannot have used another allowance on the same person). Additionally, special one-off gifts – such as wedding gifts – are exempt up to specific limits. Making use of these allowances is a simple and effective way to reduce your estate over time.

Making gifts on someone's behalf

If you are acting as an attorney under a Lasting Power of Attorney (LPA) for Property and Financial Affairs, you may assume that you can make or continue making gifts on the donor's behalf – for example, to reduce their future inheritance tax liability. However, gifting under an LPA is strictly limited and often requires prior approval from the Court of Protection. Before proceeding, consider the following:

• Be cautious: Gifts made on behalf of someone who lacks capacity are tightly regulated to safeguard their best interests.
• Check the LPA for guidance: While the document includes the donor's preferences, many gifts – particularly those made for tax planning – will still require Court of Protection approval.
• Seek legal advice: Professional guidance is essential to ensure compliance with legal requirements and to avoid potential disputes.

Conclusion

Understanding the various gifting options and their tax implications is essential for effective estate planning. By carefully considering your strategy, you can transfer wealth to family and friends while minimising inheritance tax liabilities. However, gifting rules can change – so always consult a legal professional to tailor your plan to your circumstances and ensure compliance with current laws.