How can lifetime gifting reduce my Inheritance Tax bill

Inheritance Tax (IHT) is becoming relevant to a growing number of estates. One reason is that the nil-rate band is fixed at £325,000 and the residence nil-rate band at £175,000 until the end of the 2030/31 tax year.

For a married couple or civil partners who leave a qualifying home to direct descendants, transferable allowances can, in the right circumstances, provide a combined IHT threshold of up to £1 million. From 6 April 2027, most unused pension funds and pension death benefits will also fall within the estate for IHT purposes, thereby bringing more estates into potential taxable territory.

You may therefore be considering ways to reduce the value of your estate —for example, by giving away some of your wealth during your lifetime. Done carefully, this can allow you to see loved ones benefit while also reducing the potential IHT liability on your death.

Lifetime gifting should form part of a wider estate-planning strategy. Taking advice from an appropriately qualified and regulated financial adviser, alongside legal advice, can help ensure that any gifts are affordable, properly structured and consistent with your longer-term objectives.  We would caution against making important financial decisions (such as gifting wealth) solely for tax benefits. 

What can I give away during my lifetime?

Most outright gifts to individuals, to the extent that they are not covered by an exemption, are known as Potentially Exempt Transfers (PETs). A PET will normally fall outside your estate for IHT purposes if you survive for seven years after making it.

You must also give the asset away outright. If you continue to benefit from it, for example by giving away your home but continuing to live there rent-free, your home remain within your estate for IHT purposes as you have reserved the benefit of it rather than giving it away freely and entirely. 

If you die within seven years of making a gift (subject to the exemptions), the value of the gift will be brought back into the IHT calculation. Whether tax is actually payable will depend on the value and timing of the gift, earlier gifts and the available nil-rate band.

What about taper relief?

It is a common misconception that taper relief reduces the value of a gift over time. In fact, it can reduce the tax charged on a gift made between three and seven years before death, but only where the cumulative value of chargeable gifts exceeds the available nil-rate band. Therefore, for many estates, taper relief will have no practical effect.

Which gifts are exempt from IHT?

Certain gifts are immediately exempt, so the seven-year rule does not apply. The main lifetime exemptions include the following:

• Annual exemption: You can give away up to £3,000 in total each tax year. This may be given to one person or divided between several people. Any unused exemption can be carried forward for one tax year.
• Small gifts: You can make gifts of up to £250 to any number of individuals in a tax year, provided that you have not used another exemption for the same person. The exemption does not apply if gifts to that person exceed £250 in the tax year.
• Gifts between spouses or civil partners, and gifts to charities: These are generally exempt.
• Wedding or civil-partnership gifts:
  • A parent can give up to £5,000.
  • A grandparent or great-grandparent can give up to £2,500.
  • Either party to the marriage or civil partnership can give the other up to £2,500 (provided it is given within a short period of time and that the marriage or civil partnership actually takes place).
  • Anyone else can give up to £1,000.
• Normal expenditure out of income: Regular gifts made from surplus income may be immediately exempt, provided the conditions are met.

How can gifts qualify for the normal expenditure out of income exemption?

This exemption can be particularly valuable, especially since the exemption allowances have been frozen for many years (for example the £3,000 annual allowance has not increased since 1981).  There is currently no fixed monetary limit, but all three of the following conditions must be satisfied and demonstrated to HMRC after your death:

• The gifts must form part of your normal expenditure: There should be evidence of a settled pattern or a clear commitment to make the gifts regularly. Examples might include paying an adult child's rent each month or a grandchild's school fees, by direct debit.

HMRC may examine the frequency, amount, nature and surrounding circumstances of the payments when deciding whether they form part of normal expenditure. A clear and consistent pattern, supported by contemporaneous records, will strengthen the claim.A recent tax tribunal decision in March 2026 denied a claim for regular gifts because a pattern could be established and a series of sporadic payments of differing amounts was not considered regular enough or represented a settled pattern.

• The gifts must be made from income: Income may include salary, pension income, dividends and rent. Capital withdrawals (e.g. bond withdrawals) do not usually qualify simply because they provide cash for a gift.
• You must retain enough income to maintain your usual standard of living: After making the gifts, your remaining income must be sufficient to meet your normal expenditure without resorting to capital.  This will be a subjective test based on your usual standard of living. 

To make a future claim easier for your executors to evidence, consider keeping the following records:

• A dated letter or written note recording your intention to make regular gifts, including the recipient, amount, frequency and proposed start date.
• A schedule or spreadsheet of the payments actually made, showing the date, amount and recipient.
• Clear annual records of your income and expenditure. The categories in the HMRC ‘IHT403’ schedule provide a useful guide to the information your executors may need.
• Where possible, comparable records for earlier tax years, as HMRC may consider income and expenditure over more than one year when assessing the claim.

Careful records are advisable for every substantial lifetime gift, whether or not you intend to rely on this exemption. Clear evidence can improve the prospects of a successful claim and make the administration of your estate considerably easier.

What should I do next?

We recommend taking advice on your overall Inheritance Tax position and discussing any gifting intentions as part of your estate planning. Our experienced Private Client team would be happy to help.

If you are an executor and would like advice or assistance with reporting gifts made during the deceased’s lifetime, or with making a claim for ‘normal expenditure out of income’, our experienced team would be pleased to discuss this with you.

Please remember that the information in this article is correct at the time of writing but may be subject to change in the forthcoming Budget. Always take legal advice on the current rules.