Your Guide to Inheritance Tax and Gifting

At The Insurance Surgery, we understand that planning for the future can be complex, especially when it comes to Inheritance Tax. That’s why we’ve created this straightforward guide to help you understand how gifting works and how to protect your loved ones from unexpected tax bills. Inheritance Tax Exemptions: Tax-Free Gift Allowances Explained Did you know you can give away money during your lifetime without facing Inheritance Tax charges? Here’s how to make the most of your allowances: Your £3,000 Annual Exemption – Use It or Lose It (Well, Almost!) Every tax year (6 April to 5 April), you can gift up to £3,000 completely free of Inheritance Tax. This is your ‘annual exemption’ and it’s a great way to gradually reduce your estate while helping your loved ones. How it works: 

• Give the full £3,000 to one person or spread it between multiple people.
• Didn’t use all of last year’s allowance? No problem! You can carry forward any unused exemption for one tax year.
• After that first year, though, use it or lose it!

Example: Dianne gave her son Leon £2,000 in the 2023/24 tax year, leaving £1,000 of her allowance unused. The following year, she was able to give her daughter Evelyn £4,000 tax-free (using her new £3,000 allowance plus the £1,000 carried forward). Smart planning meant both son and daughter benefited, and no Inheritance Tax was due on this amount! The Small Gift Allowance  You can make unlimited gifts of up to £250 per person each tax year without eating into your other allowances. These small gifts are immediately IHT-free – perfect for those birthday and Christmas presents! Wedding Bells Mean Bigger Gift Allowances! When your loved ones tie the knot, you can give even more tax-free:

• Children getting married? Give them up to £5,000 tax-free
• Grandchildren or great-grandchildren saying “I do”? Gift them £2,500
• Friends or other relatives walking down the aisle? You can give £1,000

These wedding gift allowances can be combined with your annual exemption too – that’s up to £8,000 tax-free to a child getting married! Regular Gifts from Income – A Powerful IHT Planning Tool One of the most valuable but often overlooked exemptions is the ability to make regular payments from your income without IHT implications. This works when:

• The payments don’t affect your standard of living
• They come from your regular income (not capital)
• There’s a pattern of regular giving

This could include paying your grandchild’s school fees, supporting an elderly parent, or contributing to a family member’s rent – all potentially free from Inheritance Tax! IHT 7-Year Rule: How this works  Any gift could potentially become completely tax-free if you survive for 7 years after making it. This is known as the ‘7-year rule’ and it’s central to effective estate planning. If you pass away within 7 years of making a substantial gift, the tax implications depend on exactly when the gift was made:

• Within 3 years: Full 40% IHT may apply
• Between 3-7 years: A sliding scale of tax relief (called ‘taper relief’) applies

Tax Relief Rates – The Longer You Live, The Less Tax Payable

Years between gift and death	rate of tax
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
Over 7 years	0%

Remember, taper tax relief only kicks in when your gifts exceed the £325,000 nil-rate band. Gifts With Reservation of Benefit: HMRC Rules You Need to Know Thinking of giving away your home but continuing to live in it? Or giving away that valuable painting but keeping it on your wall? These are called ‘gifts with reservation’ and unfortunately, they’ll still count as part of your estate for IHT purposes. For a gift to be effective for IHT planning, you need to genuinely give it away with no strings attached. How to record gifts for IHT purposes Make sure to maintain clear records of all gifts, including:

• What you gave and to whom
• The precise value
• The exact date
• Which exemption are you using

This documentation will prove invaluable to your executors and could save your loved ones thousands in unnecessary tax. Life Insurance to Pay Inheritance Tax: Trust Planning Solutions Even with careful gifting, many estates still face significant Inheritance Tax bills. That’s where you may need an expert life insurance broker to discuss protecting your assets. How Life Insurance Can Cover Your IHT Liability A well-structured life insurance policy, written in trust, provides a tax-free lump sum to your beneficiaries specifically to cover the Inheritance Tax bill. This means:

• Your family won’t need to sell cherished assets to pay the tax
• The full value of your estate can pass to your loved ones
• You’ll have peace of mind knowing everything’s taken care of

Why Choose The Insurance Surgery for IHT Planning? At The Insurance Surgery, we specialise in life insurance for Inheritance Tax planning. Our experts will:

1. Calculate your potential IHT liability based on your current estate
2. Recommend the optimal policy type and cover amount
3. Ensure the policy is properly written in trust to avoid additional tax
4. Guide you through the entire application process

FAQs 

How much money can I gift tax-free in the UK?

You can gift:

• £3,000 per year (annual exemption)
• £250 per person per year (small gift exemption)
• Unlimited gifts out of surplus income
• Unlimited gifts between spouses/civil partners
• All gifts are tax-free after 7 years

What is the 7-year rule for gifts?

If you survive 7 years after giving a gift, it becomes exempt from Inheritance Tax. If you die within that time, there is a tapered tax relief initiative that will reduce the tax depending on how many years have passed.

What counts as normal expenditure out of income?

• Must be regular and predictable
• Made from income, not capital
• Should not reduce your standard of living

Example: Monthly gift to a child funded by pension income.

Do I need to keep records of gifts?

Yes. HMRC will expect:

• Gift amounts and dates
• Your income and expenses
• Evidence that the gift was made regularly (for income-based gifts)

Contact The Insurance Surgery for Inheritance Tax life insurance

Complete The Insurance Surgery contact form or phone us on 0800 083 2829 to arrange your free, no-obligation consultation with one of our IHT planning experts.
Want More Information on Gifts and Inheritance Tax?
The official government guidance on Inheritance Tax and gifting can be found at: https://www.gov.uk/inheritance-tax/gifts However, tax rules are complex and subject to change. For personalised advice tailored to your specific circumstances, we recommend speaking with our specialists who can guide you through the options available.