3 simple ways to gift money before you pass away, and reduce Inheritance Tax in the process

Gifting money could be an easy way to transfer your wealth and reduce the risk of a big Inheritance Tax bill. Read three ways to gift your wealth efficiently.

If you have spent your life saving hard to build up your wealth, it is likely that you care immensely about how you pass this wealth on to the next generations.

If you haven’t already, beginning the estate planning process early and deciding how to divide your wealth between family members is crucial. One aspect of estate planning that might concern you is the level of Inheritance Tax (IHT) your wealth will be subject to when you die.

According to Statista, Brits paid more than £5 billion in IHT in 2020 alone.

Usually, 40% IHT is applied to any wealth above the nil-rate band (NRB) of £325,000, which is frozen until 2026. There is also a residence nil-rate band (RNRB) of £175,000 that applies if you decide to leave your home to your children or grandchildren.

To help you mitigate a potential IHT bill, there are ways to gift money throughout your life. Read three ways to pass on an inheritance and reduce your IHT liability.

1. Gift money annually by making the most of the annual exemption

If you know how much money you would like to leave to your children and grandchildren, you could begin gifting them their inheritance over the years before you pass away, to avoid paying 40% IHT on any wealth that sits above the NRBs.

In fact, this strategy might be highly beneficial for you and your family, as it could help your young adult family members create the life they want, while also reducing the taxable value of your estate over time.

You can gift up to £3,000 a tax year without paying IHT. This is known as the “annual exemption”, and is applied to individuals – meaning that as a couple, you could gift up to £6,000 a year to loved ones.

Plus, you can carry over your annual exemption for one tax year, meaning that if you gifted nothing last year, you could gift up to £12,000 as a couple this tax year.

By gifting a tax-free sum each year between now and when you pass, you could lessen the tax liability of your estate, while simultaneously allowing your loved ones to benefit from your wealth earlier in their life.

2. Understand the 7-year gifting rule

Although the annual exemption sits at £3,000, you can technically gift any amount of money you want.

However, if you pass away within seven years of giving the gift, it could be subject to IHT.

The amount of IHT you would pay exists on a sliding scale, known as “taper relief”. The below table shows exactly how much tax you might pay on gifts above £3,000, if you were to pass away before the seven-year statute has expired.

Years between gift and death

Tax to pay on gift

Less than 3 years


3-4 years


4-5 years


5-6 years


6-7 years


7+ years


Source: HMRC

Remember, taper relief only applies to gifts in excess of the NRB. It follows that, if no tax is payable on the transfer because it does not exceed the NRB (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.

In light of these rules, it may be wise to begin gifting money as early as possible. By doing this, it is more likely that the money you give will not form part of your estate, and could be free from IHT altogether.

If you want your children and grandchildren to use these gifts in a constructive way, it could be beneficial to meet with your planner as a family, to discuss how your wealth could grow in the hands of your young family members.

3. Use other savings before your pension to reduce your Inheritance Tax liability

When you reach the age of 55, you are able to begin drawing your retirement income in order to fund your lifestyle.

However, if you have other savings accounts, such as ISAs, that you plan to use to supplement your later-life income, it could be beneficial to use these savings accounts first, and leave your pension untouched as long as you can.

Your pension pot does typically not form part of your estate for IHT purposes. So, by using your other savings first, and using your pension only when you need to, you may be able to pass on more of your wealth to your beneficiaries without IHT being due.

Get in touch

Estate planning can be complex, but you don’t have to do it alone. Speak to us to find out how you could pass your hard-earned wealth to your children, while reducing your IHT liability.

Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for information only. 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.

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

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