How to give your money away to avoid inheritance taxes

Despite the fact that inheritance taxes are unpleasant to consider, there are ways to avoid them by transferring funds to your family while you are still living

We describe the operation of the rules.

Many families need help figuring out how to ensure that their assets and hard-earned money are passed to loved ones instead of HM Revenue & Customs (HMRC) because they are worried about inheritance tax (IHT).

The nil-rate band, which is the estate value exceeding 325,000, is subject to a 40 percent inheritance tax rate. For individuals, there is also the "main residence nil-rate band," which, if the beneficiary is a child or grandchild, exempts all or a portion of the family home's value from IHT.

Since 2009, the nil rate band, the primary IHT exemption, has remained frozen at 325,000.

If both the residence nil rate band and the nil rate band were adjusted for inflation, the total would now be approximately 1 point 6 million, per AJ Bell's analysis.

However, Chancellor Rachel Reeves stated that these bands would remain frozen until 2030 in the October Autumn Statement.

HMRC received 7 billion in inheritance tax receipts from April 2024 to January 2025, which is 700 million more than it received during the same period the previous year. This was due to frozen thresholds as well as rising property values and wealth.

Leaving money to the younger generation while you are still alive is one way to lower an inheritance tax bill and greatly enhance their financial situation.

Helping grandchildren is a common strategy used by grandparents to lower the value of their estate, according to Kirsty Anderson, savings and pensions specialist at M&G Wealth.

She tells BFIA: "Even though grandparents don't want to give up complete control over their finances, if they can support their grandchildren now and see the benefits, it not only benefits the grandchild but also lessens the potential IHT liability on their estate.

What is the best way to start transferring inheritance funds while you are still living and avoid paying taxes?

Determine how much you will need before you start spending money. Give away only what you can afford to lose; don't jeopardize your retirement or funds for future medical expenses.

As long as you are alive seven years after the gift, anything you give away won't be applied to your next IHT bill.

Gifts that are instantly exempt from IHT do exist, though; you just need to be aware of the restrictions and guidelines.

Here is a guide to the rules regarding gifts.

Which gifts do not have to pay inheritance tax?

The first thing to keep in mind is that gifts between civil partners and spouses who are based in the UK are exempt from inheritance tax.

"Gifts to charities are always IHT-free," says Lesley Mackintosh, founder of Independent Women, a community of financial advisers.

She says, "Your gift can lower your potential IHT bill while also making a significant difference in other people's lives."

When it comes to giving money to friends, family, children, grandchildren, and other individuals, it can be tax-free as long as it satisfies the following requirements.

You give less than £3,000 or £6,000 to a couple in a given tax year. Additionally, you can carry forward any unused £3,000 from the prior tax year, allowing you to give up to £6,000 or £12,000 to a couple. As long as the total amount given to any one person during the tax year does not exceed 250, small gifts of up to 250 may be given to any number of people. This exemption would no longer be applicable, and all gifts would begin to deplete the previously mentioned 3,000 allowance. Gifts can also be made with extra money. These contributions must be "regular" in nature, derived from income as opposed to capital, and cannot have an impact on the standard of living of the giver. Tax-free gifts of up to 5,000 from each parent, 2,500 from each grandparent, and up to 1,000 from any other individual can also be given to commemorate a marriage or civil partnership. All other allowances are not depleted by these. The wealth management company Evelyn Partners' head of estate planning, Ian Dyall, says: "The gifter's estate is instantly diminished by these exempt gifts.

Even small lifetime gifts could be helpful in sparing executors and beneficiaries the hassle and cost of paying IHT before probate, as an increasing number of estates are just outside the frozen nil-rate band of 325,000.

According to Mackintosh, it's crucial to document any monetary gifts in order to support your executors in the future and ensure that your estate gets to the people you intended it to as soon as possible after probate.

What is the seven-year inheritance tax rule?

The seven-year rule is applicable if you plan to give a granddaughter a gift amount that surpasses the aforementioned gifting guidelines, such as £10,000 from your savings to assist her in purchasing a home.

This indicates that the presents are known as "potentially exempt transfers." If you pass away within seven years, the value of the gifts is deducted from the nil-rate band, making it appear as though the gifts were never taken from the estate. Tax on assets over this threshold can reach 40%.

Dyall explains: "We say up to because taper relief can apply, which lowers the tax paid on older gifts, if the total amount of gifts exceeded the nil-rate band. The IHT rate drops to 32% if three to four years pass between the date of gift and death, and to 8% if six to seven years separate the dates. This implies that even if a gift violates the seven-year rule, it can still lower an IHT liability if it exceeds the nil-rate band.

Consider the intended use of the funds you are giving.

Will it remain in your loved one's savings account? If so, be aware that if it exceeds their personal savings allowance, the recipient may be required to pay income tax on the interest.

Mackintosh says: "If you want to avoid paying income tax on the cash gift you are giving, think about other savings options like a junior ISA, an ISA (cash or stocks and shares), or even a pension.

In the case of a pension, the amount is instantly increased by 20 percent, 40 percent, or 45 percent, depending on your loved one's tax rate. All of these offer a tax-free environment where your gift can grow and compound.

In this guide, we dispel some common misconceptions about inheritance taxes.