Gifting & inheritance tax

As we get older it’s natural that we start to think about how we can pass on part or all our wealth to dependants or family members.

inheritance guide

Inheritance tax is the key concern for those in this situation. At present in the UK, this tax is generally levied at 40% of any deceased person’s estate above a certain level. This level is known as the nil-rate band – that is, the amount of money you can pass on at a nil rate of inheritance tax.

But by planning ahead, it is possible to drastically reduce your and your family’s potential inheritance tax bill. For example, it is possible to give away money and other assets as gifts, while many people take steps to put property into some form of trust, typically with a son, daughter or other relative as beneficiary.

Whatever strategy you – in conjunction with a professional such as a solicitor of financial advisor – decide is appropriate, it is important to understand any potential pitfalls or disadvantages while also making sure you stick to the rules.

How the inheritance tax system works

Whenever someone dies in the UK, they pass on any assets they own to their relatives – whether in accordance with their will, or intestacy rules. The first £325,000 of these assets – a portion known as the nil-rate band – is free from inheritance tax. But any property, cash or investments above this level are taxed at 40%.

For example, if someone died and left £500,000 in bank savings to their children, the £175,000 of this sum above the £325,000 nil-rate band would be liable to inheritance tax, leading to a total tax bill of £70,000.

Over recent years, new rules have been introduced to the inheritance tax system to reduce the potential tax burden of estates left by couples, as well as when property is passed on.

For married couples or those in civil partnerships, there is normally

Cutting inheritance tax on property

With house prices across the country having risen steadily over recent decades, more and more families are finding themselves potentially liable for inheritance tax because of the value of their homes. To address this and to help families shelter more of their property from inheritance tax, the government has recently introduced a residence nil-rate band, which is addition to the £325,000 nil-rate band described above.

The residence nil-rate band applies when property is passed from a deceased person to their children or grandchildren. In 2019-2020 the allowance is £150,000, which means that a person who dies in this financial year can pass on £475,000 in property with no tax liable.

Gifting and inheritance tax

Giving cash and other assets away while you are still alive is one option for reducing your potential inheritance tax bill. But in some circumstances, gifts can count as part of a person’s estate if they die not long after making them.

Under what is known as the seven-year rule, seven years must elapse between a gift – of any size – being made and the giver’s death for the gift to be ignored for inheritance tax purposes.

If the death occurs between three and seven years after the gift was made, a reduced rate of inheritance tax – if necessary – will be payable.

You are allowed to make relatively small value gifts every year without any inheritance tax implications. Up to £3,000 a year (in cash or other assets) can be given away as an “exempted gift” – and any unused portion of this £3,000 can be rolled on to the next financial year (but no longer than that).

This means, if you made no gifts last year, you can give away £6,000 this year without worrying about tax.

Exempt gifts

Some additional gifts are also exempt from any inheritance tax calculations: for example, you can give away as much as £1,000 in wedding gifts per year (rising to £2,500 for a grandchild or great-grandchild, and £5,000 for a child).

Normal birthday or Christmas gifts are exempt – provided they are no so large that they affect your standard of living.

Any payments to help with a relative’s living costs are also exempt, as are gifts to charities and political parties.

Bear in mind that if you sell property to a relative at less than the market rate, the difference will be considered by tax officials to be a gift. So if you sell a flat with a market value of £250,000 to your son or daughter for £200,000, you have made a £50,000 gift for potential inheritance tax purposes.

Giving away property

For most families, property is their most valuable asset and there are a number of strategies that can be employed to minimise the potential inheritance liability of a home that is worth hundreds of thousands of pounds – if not more.

Some people may consider giving away ownership of their home to a relative such as a son or daughter. But if the giver remains living in the property, this transfer of ownership would be described as a “gift with reservation of benefit”. This means that the giver would need to pay a market rate of rent to the recipient of the gift in order for it to fall outside the scope of inheritance tax once seven years have elapsed.

Another issue to be aware of when giving away or even selling property (especially if you do so at a reduced rate) is the implications for the likes of capital gains tax and stamp duty. You should always seek expert, independent advice from a solicitor or financial advisor with experience in dealing with inheritance tax and property.

Trusts and inheritance tax

Putting assets into a special legal arrangement known as a trust can be a way of reducing potential inheritance tax liabilities.

Trusts can be set up for the benefit of a specific relative with conditions attached – for example, the money in them can only be accessed when the beneficiary reaches a certain age. But trusts can be expensive to create – given the expert help you are likely need – as well as very complicated. Again, it is vital that you seek expert, independent advice if you are considering going down this route.

Putting assets into a trust does not instantly shelter them from inheritance tax – as with gifts (see above), the seven-year rule applies. With certain types of trust, there may be an upfront inheritance tax charge if the asset going into the trust exceeds your nil-rate band, as well as further charges at certain points in the future. You will also need to appoint a trustee to manage the trust.

Giving to charity

If you leave some of your assets to charity when you die, this money will not count towards the overall value of your estate. And under current rules, if you leave at least 10% of your “net estate” – that is, the taxable portion over and above the £325,000 nil-rate band – to charity, you can reduce the 40% inheritance tax rate on the rest of your estate to 36%.

For example, if your total estate was worth £525,000, this would result in a net estate of £200,000 and an inheritance tax bill of £80,000 at 40%, leaving your family with £445,000.

But if you left 10% of the net estate – £20,000 – to charity, your family would pay 36% inheritance tax on the remaining £180,000, which would mean a bill of £64,800 and an overall inheritance of £440,200.

Effectively, your decision to give £20,000 to charity would have reduced your relatives’ after-tax inheritance by £4,800 – a trade-off that many families will find attractive.

The importance of a will

Making a detailed will and keeping it up to date with changes in circumstances such as births, marriages and divorce is a vital element in effectively managing inheritance tax liabilities – not to mention making the lives of surviving family members significantly easier in the immediate aftermath of a loved one’s death.

When drawing up a will, it may also be an opportunity to think about how family members will be able to pay any inheritance tax bills that are due in the event of your death. Often, such bills can be paid out of the money held in savings or by cashing in investments.

But when the main or only asset passed on is a property, this can create problems given that any inheritance tax bill might have to be settled before it is possible to sell the property – or that the family may be unwilling to sell it. It could be worth considering, therefore, taking out a life insurance policy designed specifically to pay out a sum that will cover the inheritance tax bill the deceased’s family is likely to be faced with.

Placing that policy in a trust – after seeking specialist advice – may mean that it can pay out before the probate process is completed, as it should not be considered part of the deceased’s estate.


Understanding rules around inheritance and gifts is a crucial way to give dependents and family members the best possible start in life. If your situation is complicated or you struggle to understand the rules, then speak to a solicitor or financial adviser.

Note: We take care to ensure Talking Finance content is accurate at the time of publication. Other gift and inheritance tax rules apply. Information provided in this article is based on our interpretation of the current inheritance tax rules. Tax rules can change in the future and depend on your individual circumstances.