28 May 2025
general
Navigating the complexities of Inheritance Tax (IHT) can feel like a daunting task, especially as regulations evolve and more assets fall within its scope. Here, proactive planning can be a powerful tool to combat this and potentially mitigate your future IHT liability.
For example, you could use lifetime financial gifts as a way to lower the value of your estate, meaning you have more control over the wealth you intend to pass on to your loved ones.
Keep reading to learn what strategies you could use to reduce a potential IHT bill, with clear explanations of the rules and potential downsides.
Understanding the basics of Inheritance Tax can lay the groundwork for effective planning
Before we discuss gifting strategies, it’s important to ensure you understand the fundamentals of IHT. This is a tax that can be levied on the value of a person’s estate when they die. It can include property, money, and possessions.
The 2025/26 standard rate of IHT is 40% on the portion of the estate above the nil-rate band, which is £325,000. This threshold can increase to £500,000 if you were to leave your home to a direct descendant and so benefit from the residence nil-rate band of £175,000.
More than that, you can combine allowances with your spouse or civil partner, effectively achieving a £1 million threshold.
1. Using your annual exemption can gradually reduce your estate’s value
One of the simplest, yet often underused, gifting strategies involves making full use of your annual exemption.
As of the 2025/26 tax year, you can gift up to £3,000 a year without the money being subject to IHT. You can carry this allowance forward for one tax year if you didn’t use it previously. This means you could potentially gift up to £6,000 in a single year.
If you were to consistently use this annual exemption, you could gradually reduce the value of your estate over time, chipping away at your potential IHT liability without triggering any immediate tax consequences.
2. The small gift exemption allows you to make modest gifts without Inheritance Tax implications
Beyond the annual exemption, the small gift exemption allows you to make gifts of up to £250 to as many individual people as you’d like. None of these would be subject to IHT.
This can be a useful way of providing small tokens of support or celebration to multiple people without incurring a tax bill.
It’s important to note that you can’t use this in conjunction with the annual exemption if you’re gifting to the same person.
3. Gifting from surplus income allows you to make regular gifts as long as they don’t affect your standard of living
Perhaps one of the most powerful gifting strategies is the “gifting from surplus income” rule. This allows you to make regular gifts from your income, provided these gifts don’t impact your usual standard of living.
To qualify, your gifts must meet the following criteria:
This gifting strategy can be particularly useful if you want to support your family with regular payments, such as contributing to a grandchild’s education or providing financial support to an elderly relative.
Gifting from surplus income can become complicated, so it’s vital that you keep accurate records of payments and take professional advice on the matter.
4. Making potentially exempt transfers requires careful timing and a consideration of survival rules
Potentially exempt transfers (PETs) involve gifting assets that would normally be subject to IHT. If you survive for seven years after making a PET, the gift will fall entirely outside of your estate for IHT purposes.
However, if you die within seven years, the value of the gift may be brought back into your estate and become subject to IHT.
If you were to die between three and seven years after giving the gift, then taper relief might apply. This gradually reduces the amount of IHT your beneficiaries would owe.
Understanding the rules and what would happen if you don’t is crucial when considering PETs. If you’re concerned, we could help you implement a strategy to protect your beneficiaries from IHT.
5. Donating to charity can provide significant IHT relief
Gifting to registered charities during your lifetime or in your will can offer significant IHT benefits. Lifetime gifts to charity are exempt from IHT. More than that, if you leave at least 10% or more of your estate to charity, your IHT rate may be reduced on the remaining value of your estate.
This not only helps you support a cause you care about, but has the potential to dramatically reduce your IHT liability.
6. Seeking professional financial advice is crucial for effective Inheritance Tax planning
While understanding these helpful gifting strategies is valuable, IHT rules can be complicated. That’s where the support of a qualified financial adviser comes in.
We can assess your individual circumstances, help you understand the potential IHT implications for your estate, and offer advice regarding the most appropriate gifting strategies for you.
We’ll ensure that your gifting plans are aligned with your long-term goals, so that you don’t need to compromise your lifestyle or financial wellbeing.
Talk to us today about how we can help you navigate the tricky IHT landscape and potentially gift your way to a lower IHT bill.
Email enquiries@jesellars.co.uk or call 01934 875 919 to find out more about how we can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
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 or tax planning.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (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.
