5 key questions about Inheritance Tax and gifting answered

Inheritance Tax (IHT) is a top concern for many of our clients because it can erode the wealth they hope to pass on.

Gifting wealth during your lifetime could be a useful way to reduce a potential IHT bill, while also giving you the pleasure of seeing your loved ones enjoy their inheritance.

However, new research from Canada Life shows that 59% of UK adults are confused by IHT rules. What’s more, only 15% are confident about how much they can gift each year without triggering an IHT charge.

So, we’ve put together a list of the questions we’re asked most often about IHT. We hope our answers clear up some of the confusion, and we’re here to help if you’d like advice about passing your wealth on tax-efficiently.

1. “Does everyone pay IHT?”

No, your estate will only trigger an IHT charge if its value exceeds the nil-rate band (£325,000 in 2026/27) at the time of your death. An extra £175,000 (the residence nil-rate band) allowance applies if you leave your main home to your children or grandchildren, raising the total to £500,000.

Married couples and civil partners can combine their allowances to pass on up to £1 million IHT-free.

If you leave all your assets to your spouse or civil partner, there’s normally no IHT to pay (more on this later). Likewise, any gifts you leave to a qualifying charity are generally 100% IHT-free.

The latest government figures show that in the 2023/24 tax year, just 4.72% of UK deaths resulted in an IHT charge.

2. “Do I pay IHT if I leave everything to my spouse?”

There’s normally no IHT to pay if you leave your entire estate to your spouse or civil partner. This is known as the “spouse exemption”, and it applies regardless of your estate’s value.

Additionally, any unused portion of your nil-rate and residence nil-rate bands can be transferred to your surviving spouse or civil partner when you pass away. This means a couple may be able to pass on up to £1 million free from IHT.

It’s important to note that the spousal exemption does not apply to unmarried cohabiting couples.

Also, if the person who died is a UK long-term resident, but their surviving spouse or civil partner is not, the spouse exemption is restricted to the £325,000 nil-rate band, unless special elections are made.

3. “How does the regular gifting exemption work?”

According to research by Canada Life, 72% of UK adults are unaware that gifts from surplus income are immediately exempt from IHT.

And yet, this little-known rule could potentially allow you to pass on unlimited wealth without your beneficiaries facing an immediate IHT charge, provided your gifts meet the following conditions:

• They must come from your regular net income, not from savings or other capital
• They must be made regularly as part of your normal spending, rather than as one-off payments
• They must not reduce your usual standard of living.

A financial planner can advise you on making gifts that meet HMRC’s conditions and help you understand what records to keep so that you can show your payments qualify.

4. “Can I give my house to my children to reduce a potential IHT bill?”

Your house might be one of your most valuable assets, so gifting it to the next generation could be a generous and efficient way to reduce the size of your estate for IHT purposes.

Your children won’t pay any IHT on property they inherit from you if your estate falls below the available nil-rate bands.

However, if your estate exceeds these allowances, you’ll need to meet strict conditions to pass your home on without triggering an IHT charge for your children, most notably:

• Surviving for seven years after giving the gift
• Not continuing to benefit from the property.

The seven-year rule

If you gift your home to your child, this will normally be treated as a potentially exempt transfer (PET). This means that if you die within seven years of giving your home away, IHT will be payable on a sliding scale depending on how long you survived after making the gift.

If you die within the first 7 years, and the value of your total gifts in that period do not exceed your Nil Rate Band (£325,000), the full 40% IHT rate will be charged on the failed PET.

If the total gift is more than your Nil Rate Band, this is treated as follows:

1. The value within your Nil Rate Band (the first £325,000 of the gift) is subject to IHT at 40%
2. For the value above the Nil Rate Band a reduction of between 20% and 80% will be applied if you survive between three and seven years, tapering to full exemption after seven years.

Gifts with reservation of benefit

If you put your home in your child’s name but continue to live in it, HMRC will normally treat this as a “gift with reservation of benefit”, and the property will remain inside your estate.

To avoid this, you’ll need to move out permanently or pay rent at the market rate to your child; paying a peppercorn rent will not be enough to meet the criteria.

5. “How are the IHT rules for pensions changing?”

Currently, pensions are a powerful estate planning tool because they can often be passed on without triggering an IHT charge.

From 6 April 2027, most unused pension funds and death benefits will no longer be exempt from IHT and will count towards the value of your estate.

You’ll still be able to leave your pensions to your spouse or civil partner without them facing an IHT bill. There are also several exceptions to the new rules. For example, death-in-service benefits and certain ongoing payments to a spouse or civil partner from a defined benefit (DB) pension will normally be exempt from IHT.

However, if your current estate plan is built around using your pension to pass wealth on tax-efficiently, it’s worth consulting a financial planner who can review your strategy in light of the new rules.

Get in touch

If you have further questions about how Inheritance Tax and gifting work, or you’d like help creating an estate plan for passing wealth on tax-efficiently, we’d love to hear from you.

Please get in touch by email at helpme@aspirellp.co.uk or call 0117 9303510.

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 Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.