Smart Gifting: Tax Efficient Ways to Support Your Family
Gifting money to family members is one of the most effective ways to reduce your Inheritance Tax exposure. But the rules are specific, and many families miss out on allowances that reset each tax year. Here is what you need to know before 6 April 2026.
In this guide
With Inheritance Tax (IHT) charged at 40% on estates above the nil-rate band, passing wealth to the next generation can come with a significant tax cost. However, a range of gifting exemptions are available that allow you to pass money to family members completely free of IHT.
Crucially, several of these exemptions are annual allowances. If you do not use them before 5 April 2026, the opportunity is lost for this tax year.
The £3,000 Annual Gifting Exemption
How can gifting reduce Inheritance Tax?
Each individual can give away up to £3,000 per tax year free of Inheritance Tax under the annual exemption. This reduces the value of your estate immediately. Couples can give up to £6,000 combined per year. Unused allowance from the previous year can be carried forward once, potentially doubling the available amount.
Each individual can gift up to £3,000 per tax year free of IHT. This comes directly off the value of your estate and reduces any future IHT liability immediately.
Importantly, if you did not use last year's annual exemption, you can carry it forward one year. This means you could give away up to £6,000 this tax year, or £12,000 if you are giving as a couple.
These sums can add up over time. A couple giving away £6,000 per year over 10 years would remove £60,000 from their estate, potentially saving £24,000 in Inheritance Tax for their beneficiaries.
The Small Gifts Exemption
In addition to the annual exemption, you can give up to £250 per person per tax year to as many individuals as you like, completely free of IHT. The only condition is that the recipient has not already benefited from your £3,000 annual exemption.
This is useful for birthday and Christmas gifts to a wide circle of family and friends. It does not sound like much, but it keeps smaller regular gifts completely outside the IHT rules.
Wedding and Civil Partnership Gifts
If someone close to you is getting married or entering a civil partnership, you can make a tax-free gift in celebration. The limits depend on your relationship to the recipient:
- To a child: up to £5,000 free of IHT
- To a grandchild or great-grandchild: up to £2,500
- To any other person: up to £1,000
These exemptions apply per parent, so a couple could give their child up to £10,000 towards a wedding completely free of IHT.
Gifts from Surplus Income
One of the most powerful but underused IHT exemptions is the ability to make regular gifts from surplus income. There is no upper limit to this exemption, provided:
- The gifts are made regularly (not one-off lump sums)
- They come from your income, not your capital
- They do not reduce your own standard of living
This exemption suits people with a reliable income surplus, such as retirees with a generous pension who do not spend everything they receive. A regular monthly or annual transfer to children or grandchildren can remove significant wealth from your estate over time without any seven-year clock running.
Documentation is important. Keep a record of your income and expenditure to demonstrate that gifts are genuinely coming from surplus income. HMRC may ask for evidence in future if queried.
Larger Gifts and the Seven-Year Rule
What is the seven-year rule for Inheritance Tax?
Gifts above the annual exemptions are known as Potentially Exempt Transfers. If you survive seven years after making the gift, it falls outside your estate for IHT purposes. If you die within seven years, the gift may be subject to a sliding scale of tax relief called taper relief for gifts over £325,000.
For larger gifts that exceed the annual exemptions, the seven-year rule applies. These are called Potentially Exempt Transfers (PETs). If you live for seven years after making the gift, it is completely outside your estate. If you die within that period, the gift may still be subject to IHT, though taper relief can reduce the amount due on gifts made more than three years before death.
Starting the seven-year clock as early as possible is important. A gift made today rather than in five years' time could mean the difference between the gift being fully taxable and being partially or fully exempt.
Frequently Asked Questions
How much can I give away tax-free each year?
Each person can give away £3,000 per tax year under the annual exemption, plus £250 to any number of individuals under the small gifts exemption. These allowances can be used alongside wedding gift exemptions and the surplus income exemption.
Can my spouse and I combine gifting allowances?
Yes. Each spouse has their own £3,000 annual exemption, so a couple can give away up to £6,000 per year combined. If the previous year's allowance was unused, this rises to £12,000.
Do gifts to charity count as part of the annual exemption?
No. Gifts to registered charities are completely exempt from IHT regardless of the amount. They do not use up your £3,000 annual exemption.
Important Information
This article is for general information only and does not constitute financial advice. Tax rules and allowances may change and depend on individual circumstances. Inheritance Tax planning is not regulated by the Financial Conduct Authority. Off Piste Wealth is authorised and regulated by the FCA for financial planning services.
For a complete overview of tax year end planning, read our tax year end planning guide. You may also find our guide to investing an inheritance useful.
Get in touch with Off Piste Wealth to discuss Inheritance Tax planning and gifting strategies for your family.