Gifting and inheritance tax explained: how to reduce IHT in 2026

Passing on wealth in a tax-efficient way has always been a priority for families but changes to the inheritance tax regime next year has given it extra emphasis, especially with IHT thresholds frozen and asset values remaining high.

Gifting can help reduce the value of your estate, but the rules are detailed and mistakes can be costly. And as you’d expect from a financial advisory group, a clear, well-planned approach is important!

How does gifting affect inheritance tax?

When you give away money, property or investments during your lifetime, their value may no longer be included in your estate as far as inheritance tax is concerned.

For the 2026/27 tax year, the nil-rate band remains at £325,000. In some circumstances, an additional residence nil-rate band of up to £175,000 may be available when a qualifying residence is passed to direct descendants.

Inheritance tax is generally charged at 40% on the value of an estate above the available thresholds, subject to any applicable exemptions and reliefs.

What counts as a gift for inheritance tax?

A gift can include more than simply giving someone money. Property, shares and investments, valuable possessions and even certain assets transferred into trusts. How they are treated for the purposes of IHT depends on the type of gift, its value and your circumstances.

Inheritance tax gifting allowances and exemptions

That said, There are exemptions and allowances that may allow gifts to be made without creating an inheritance tax liability.

Here are the main ones.

Annual exemption

You can give away up to £3,000 each tax year using your annual exemption. You can give the full amount to one person or split it between several people.

If you do not use the full exemption, you can carry forward any unused amount for one tax year. The previous year’s allowance must generally be used before the current year’s allowance.

Small gifts

You can make as many gifts of up to £250 per person as you like during each tax year, provided that person has not received another gift that uses your annual exemption or another gifting allowance.

Wedding and civil partnership gifts

Wedding and civil partnership gifts are also exempt within certain limits. You can give:

• Up to £5,000 to a child
• Up to £2,500 to a grandchild or great-grandchild
• Up to £1,000 to anyone else

These allowances may be used alongside some other gifting allowances, subject to the relevant rules.

Gifts from surplus income

Regular gifts made from your income may also be exempt from inheritance tax. This is known as normal expenditure out of income.

There is no set limit to how much you can give under this exemption, provided the payments are made regularly from your income and do not affect your usual standard of living.

For example, you may provide regular financial support to a family member or make regular payments towards their living costs.

It is important to keep clear records to demonstrate that the conditions for this exemption are met.

The seven-year rule explained

Even gifts that do not fall within an exemption may be treated as potentially exempt transfers.

For example, if you survive for seven years after making the gift, it will generally fall outside your estate for inheritance tax purposes.

If you die within seven years of making the gift, it may still be taken into account when calculating inheritance tax.

If the total value of gifts made within the seven years before your death is above the available nil-rate band, taper relief may reduce the rate of inheritance tax due on certain gifts made between three and seven years before death.

The amount of tax that may be due depends on the value of the gifts, when they were made and your wider circumstances. As you’ve probably gathered, this aspect is far from clear-cut and is a complex area.

Can I give away my house to avoid inheritance tax?

Giving away your home does not necessarily mean it will escape the inheritance tax net.

If you do give away a property but continue to benefit from it, such as by continuing to live there without paying a full market rent, it may still be treated as part of your estate. This is known as a gift with reservation of benefit.

Common gifting mistakes

As ever, gifting needs to be considered as part of a wider plan and is to be considered carefully.

This could mean giving away too much as it can affect your own financial security, particularly later in life. Make sure you retain enough assets and income to meet your future needs.

As well as the reservation of benefit, poor record keeping can create further complications. Keeping a clear record of gifts, including their value, date and recipient, can help with estate administration in the future.

Planning gifts as part of your financial plan

Starting early can provide more opportunities to use available allowances and exemptions, particularly because of the seven-year rule.

Using different allowances together may gradually reduce the value of your estate without affecting your lifestyle. And as we’ve already emphasised but it bears repeating,any gifts should be considered alongside your own financial needs and future plans.

And it probably goes without saying but we’ll say it anyway, it’s vitalto consider family circumstances and your long-term intentions. A financial plan can bring this into one, easily understandable place for you and for what comes next.

Is gifting the best way to reduce inheritance tax?

Gifting is part of a strategy but not the only way to manage the potential pitfalls of inheritance tax.

Other approaches, such as trusts and other forms of financial planning, may also be appropriate, as ever depending on your circumstances and objectives.

The Government currently intends that, from April 2027, most unused pension funds and pension death benefits will be included in an individual’s estate for inheritance tax purposes

This means pensions may become an increasingly important part of estate planning for some families.

The right approach will depend on your financial position, your family and what you want to achieve.

Frequently asked questions

How much can I gift each year without paying inheritance tax?

You can give away up to £3,000 each tax year using your annual exemption. You may also be able to make small gifts of up to £250 per person and additional gifts for weddings or civil partnerships within set limits.

Other exemptions may also apply, including gifts made as part of your normal expenditure out of income.

What happens if I die within seven years of making a gift?

The gift may still be taken into account when calculating inheritance tax. If the total value of gifts made within the seven years before your death is above the available nil-rate band, taper relief may reduce the rate of tax due on certain gifts made between three and seven years before death.

Are gifts from income tax-free?

Regular gifts made from income may be exempt from inheritance tax if they are made as part of your normal expenditure, come from your regular income and do not affect your usual standard of living.

The rules are specific, and clear records should be kept.

Do I need to declare gifts to HMRC?

There is generally no need to report most gifts to HMRC when they are made. However, accurate records should be kept as information about gifts may be needed when dealing with an estate after death.

Can I give away my house to avoid inheritance tax?

Giving away your home does not necessarily remove it from your estate for inheritance tax purposes. If you continue to benefit from the property, it may still be considered part of your estate.

Professional advice should be taken before making significant gifts or transferring property.

Final thoughts

Gifting can be a valuable part of inheritance tax planning, but the rules are complex and timing matters.

A well-structured plan can help you make use of available allowances and exemptions while considering your own financial security and the wealth you want to pass on.

Speak to a Foster Denovo adviser to explore how gifting could fit into your wider financial plan and take a more confident approach to passing on your wealth.

Get in touch:

Please contact your Foster Denovo Partner or email advise-me@fosterdonovo.com or call 0330 332 7866 for more information.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, Lasting Powers of Attorney, or will writing. 

Foster Denovo Private Wealth is a trading name of Foster Denovo Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: Foster Denovo Limited, Ruxley House, 2 Hamm Moor Lane, Addlestone, Surrey, KT15 2SA.
Telephone: 01932 870 720  |  Email: info@fosterdenovo.com  |  Website: www.fosterdenovo.com