Giving gifts to your loved ones can be both rewarding and highly tax-efficient.
Whether you’re supporting a relative through their education, helping them buy a house, or investing in their business, watching your money make a difference in someone else’s life can be very fulfilling.
At the same time, gifting can also play an important role in your estate planning and may help reduce potential Inheritance Tax (IHT) liabilities. However, if your gifts aren’t carefully structured, they may still fall within the scope of IHT.
So, if you plan to use gifting as an estate planning strategy, it’s important to ensure you get the most out of what you give.
Read on to discover four steps to help ensure your gifts have the greatest impact.
1. Understand your allowances and how to make full use of them
The first step in making the most of your gifts is to understand the allowances available to you, so you can identify what can be passed on tax-efficiently and where careful planning may be needed.
For the 2026/27 tax year, the main IHT allowances are:
- £325,000 standard nil-rate band, which is available to everyone.
- £175,000 residence nil-rate band, which is an additional allowance when your main home is passed to direct descendants, though it tapers if your estate exceeds £2 million.
- Spousal exemptions, which allow you to transfer assets and any unused nil-rate bands to a spouse or civil partner free from IHT.
Combined, these allowances allow you to pass on up to £500,000 free from IHT, rising to as much as £1 million if you’re planning with your partner. Anything within these thresholds typically falls outside of IHT, making them key to understanding your overall liability.
Alongside these bands, there are also a number of gifting exemptions that allow you to make certain transfers without creating an IHT liability.
The most commonly used is the annual exemption, which allows you to give away up to £3,000 each tax year (2026/27) without it being added to your estate. Any unused allowance can be carried forward for one year, and couples can combine their allowances.
Other exemptions include:
- Wedding and civil partnership gifts up to £5,000, with the limit depending on your relationship to the recipient.
- Small gifts exemption of up to £250 per person, provided they don’t form part of a bigger gift.
- Regular gifts from surplus income, as long as they don’t adversely affect your standard of living.
Gifts that fall outside these exemptions are usually treated as Potentially Exempt Transfers (PETs).
PETs fall outside your estate for IHT purposes if you survive seven years from the date of the gift. If you die within seven years, the gift may still be subject to IHT, although taper relief can reduce the amount depending on how long you survive.
2. Consider who is best placed to give the gift
Coordinating your gifting strategy with your spouse or civil partner can be very effective, as it allows you to make full use of your combined allowances and exemptions.
When doing this, it’s important to think carefully about which partner makes each gift, as this can influence the overall tax efficiency of your planning.
For example, if one of you has a higher income, it may make more sense for them to give regular gifts from surplus income.
Similarly, your respective ages and health may also play a role in deciding who gives the gift. If one partner is older or in worse health than the other, it may be more effective for the younger or healthier partner to make a PET, as they have a greater chance of outliving the seven-year rule.
3. Plan when to give your gift
When you choose to make a gift can be just as important as what you give and who gives it.
For instance, gifting sooner rather than later generally improves the chances of PETs moving outside your estate for IHT purposes.
Moreover, rather than relying on occasional larger transfers, it may be more effective to give smaller, consistent gifts over the long term to make full use of your exemptions each year.
It’s also important to factor in Capital Gains Tax (CGT), as gifting certain assets may be treated as a disposal. In some instances, you may want to spread your gifts across multiple tax years to help reduce CGT by making use of the CGT Annual Exempt Amount more than once.
You can also put gifts into trust to ensure they are only accessed when certain conditions are met, though it’s important to seek advice before doing so.
4. Ensure you are familiar with the risks involved
Understanding the risks associated with gifting can help ensure your strategy remains both effective and efficient. Common risks include:
- Gift with reservation of benefit – If you give away an asset but continue to benefit from it, it may still be included in your estate for IHT purposes. A common example is transferring a property to a family member while continuing to live there without paying full market rent.
- CGT liability – Transferring certain assets, such as property or shares, can trigger CGT even if no cash is passed on. So, it’s important to consider this before gifting anything other than cash.
- Poor record-keeping – Maintaining clear documentation of gifts is key, particularly if they are made from surplus income. Without proper records, it can be difficult to demonstrate that gifts were regular, came from excess income, and didn’t affect your standard of living.
- Not focusing on your own needs – Before making gifts, ensure you have sufficient wealth to support your own retirement, lifestyle, and potential care costs.
A financial planner can help you avoid these risks and ensure your gifting strategy supports both your goals and legacy plans.
To speak to a financial planner, get in touch.
Email admin@stonegatewealth.co.uk or call us on 01785 876222.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals 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 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.
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