Families across the UK are increasingly choosing to give away their wealth while they're alive rather than waiting for death, as frozen inheritance tax thresholds push more estates into the taxable bracket.
This "giving while living" trend has accelerated as inheritance tax receipts hit a record £7.5bn in the 2023/24 tax year, according to independent, marking a significant increase from previous years. The surge reflects how the inheritance tax threshold has remained frozen at £325,000 since 2009, despite soaring house prices and inflation dragging more families into the tax net.
The government taxes anything above the threshold at 40 per cent, unless it qualifies for reliefs or passes to a spouse or charity. However, gifting rules offer legitimate workarounds to pass on money during your lifetime without triggering immediate tax consequences.
Why families are gifting early
Young adults are struggling with high living costs, unaffordable housing and student debt. For many parents and grandparents, the most obvious solution is to provide financial help now when it matters most.
"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."
The strategy becomes more urgent as reports suggest the Treasury is exploring changes to inheritance tax rules, potentially scrapping the seven-year gifting rule and setting lifetime caps on tax-exempt family gifts. According to City A.M, these policy considerations come as the government faces pressure to raise significant new revenue.
Current gifting allowances
Several exemptions allow you to give away money or assets each year without incurring inheritance tax. The annual exemption permits gifts up to £3,000 each tax year, which can be carried forward one year, meaning a couple could give £12,000 together if unused the previous year.
The small gifts exemption allows 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 are exempt up to £5,000 for a child, £2,500 for a grandchild, or £1,000 to anyone else.
Perhaps the most underused rule allows regular gifts from your surplus income without affecting your estate, as long as it doesn't reduce your standard of living. This could include paying a grandchild's school fees.
The seven-year rule
Larger gifts outside these exemptions fall under "potentially exempt transfer" rules. If you survive for seven years after making the gift, it falls outside your estate for inheritance tax purposes. 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.
"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," Fuller explains. "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."
However, this strategy faces uncertainty as the Treasury may be reviewing the seven-year rule as part of wider tax changes.
Important warnings
Not all gifts are equal under tax rules. Giving away property or assets you still benefit from, like transferring a home but continuing to live in it rent-free, can trigger "gift with reservation of benefit" rules. In those cases, HMRC may still count the asset in your estate.
Capital gains tax may apply if you gift certain assets, such as shares or a second home, even if there's no cash exchanged. 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," he advises. Whatever your strategy, documentation is essential for executors and probate purposes.
Sources used: "PA Media", "independent", "City A.M" Note: This article has been edited with the help of Artificial Intelligence.
