What you need to know about gifting money to loved ones

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Shares Magazine

13 August 2026

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More people are thinking about passing wealth on during their lifetime rather than as a legacy in a will. The idea of giving with “warm hands” has gathered pace in recent years and is likely to receive even more attention as we approach April 2027, when unused pension pots are set to become part of an estate for inheritance tax (IHT) purposes.

Giving money away can be one of the most effective ways to reduce a future IHT bill, but the rules are more complicated than many people realise. Get them wrong and your family could face an unexpected tax charge.

Here are some of the key areas people where people might trip up.

Make the most of allowances while you can

Everyone can give away up to £3,000 each tax year under the annual IHT exemption. If you didn’t use last year’s allowance, you can carry it forward for one year, potentially allowing gifts of up to £6,000. 

While useful, this allowance has remained frozen since 1981. Had it risen in line with price inflation, it would be worth nearly £12,000 today.

You can also make gifts of up to £250 per person under the small gifts exemption, although this cannot be used for someone who has already benefited from your annual exemption.

Wedding gifts offer a valuable opportunity

Special IHT exemptions apply to gifts made in anticipation of a wedding or civil partnership. You can give up to £5,000 tax-free to a child, £2,500 to a grandchild or great grandchild, or up to £1,000 can be given to anyone else. 

Used strategically, two parents could potentially pass on £24,000 between a couple immediately free from IHT by combining the annual and wedding allowances.

However, timing is critical. The gift must be made before the ceremony, and the wedding or civil partnership must go ahead. Gifts made afterwards generally lose the benefit of the exemption and become potentially exempt transfers.

Gifts from income can be extremely valuable

One of the most generous but overlooked IHT exemptions allows unlimited gifts from income.

To qualify, the gifts must form part of your normal expenditure, come from surplus income rather than capital, and not affect your standard of living.

Income can include earnings, pension income, investment income and savings interest. However, money raised from selling investments generally does not count as income for these purposes.

The challenge is proving the exemption applies. Although officially it is up to the person making the gift(s) to demonstrate that they are eligible for the exemption, in reality, your personal representatives will have to declare the gifts made after you’ve passed way using the relevant IHT paperwork. 

Keeping clear records of income, expenditure and gifts can make life considerably easier for them later on, along with evidence that you maintained your normal lifestyle without dipping into capital.

Don’t misunderstand the seven-year rule

Outside of the main allowances and exemptions, you normally need to survive seven years after making a gift for it to fall fully outside your estate for IHT purposes. 

One area that causes confusion is taper relief, as many people assume it reduces the value of a gift or applies automatically to all gifts after three years. Neither is true.

Taper relief only applies where IHT is actually payable on a failed gift, typically because gifts made in the seven years before death exceed the available nil-rate band. Even then, it reduces the tax due, not the value of the gift itself.

For larger gifts, professional financial advice can help you understand the potential tax consequences and ensure you don’t give away more than you can comfortably afford.

Beware gifts with strings attached

Giving away an asset does not automatically remove it from your estate.

If you continue to benefit from something after gifting it, HMRC may treat it as a “gift with reservation of benefit”. The asset can then be pulled back into your estate for IHT purposes. 

The classic example is gifting your home to children while continuing to live there rent-free. But the rules can also catch holiday homes, artwork and even business assets where the donor retains certain rights.

Consider protection during the seven-year period

If you’ve made substantial gifts, life cover can help protect beneficiaries from a potential IHT bill should you die before the seven years are up.

However, any policy intended for this purpose should normally be written in trust. Otherwise, the insurance payout itself could form part of your estate and potentially worsen the IHT problem you were trying to solve.