Gifting is one of the most effective ways to cut a family's inheritance tax bill but getting the rules wrong can cost tens of thousands of pounds more in tax, warns Charlene Young, senior pensions and savings expert at AJ Bell.
A decade of rising asset values and frozen allowances have driven the government's inheritance tax receipts to record highs. Young said this, combined with pension changes due in April 2027 that will bring unused pension pots into estates, has driven growing interest in gifting.
HMRC treats a wide range of transfers as gifts, from cash and investments to property or the shortfall when an asset is sold below market value, Young said. Spousal and civil partner gifts are fully exempt, but other gifts carry allowances and record-keeping duties.
"It's an area where financial advice is invaluable and paying an adviser could help you avoid costly mistakes," she said. "Get the rules wrong, and you run the risk of leaving your loved ones with less than you'd hoped for as the gift is still part of your estate. On the flip side, you could be tempted to give away too much, leaving yourself short and without enough to live on in later life."
For those who are in a position where they can afford to give money away, here are seven mistakes that AJ Bell thinks they should watch out for.
Not making the most of your annual gifting allowances
"There are gifts you can give every tax year that are exempt from IHT and reduce the value of your estate," Young explained.
Individuals can give away £3,000 tax-free each year under the annual exemption or carry forward one year's unused allowance to double this to £6,000. Unlimited £250 gifts per person are also available, provided that person hasn't already received money under the annual exemption.
Giving away property you continue to benefit from
Signing over a house doesn't remove it from an estate if the donor still benefits from it, Young said. The 'gift with reservation of benefit' rules pull such assets straight back into the estate at death, unless a home is let at full market rent under a formal tenancy.
"For a transfer to be a true gift, the person making the gift must not be able to benefit from it," she said.
The same principle applies to other assets, such as donated artwork still on the giver's wall, a holiday home they still use or shares where the donor retains voting rights or a buyback option.
Misunderstanding the seven-year rule
Gifts generally leave an estate after seven years and taper relief can reduce tax on gifts made three to seven years before death. Young said the relief is often wrongly assumed to reduce the gift's value, when it only cuts the tax rate on the portion of gifts exceeding the nil rate band.
She used the example of Sarah, who gifted £400,000 and died just over six years later, leaving a £1m estate against a £325,000 nil rate band. In practice, the gift used up all of her nil rate band first, with the £75,000 above this subject to IHT.
"Taper relief reduces the rate of IHT on the £75,000 taxable amount to 8%, but as her nil rate band has already been used up, the remaining £600,000 estate is subject to IHT at 40%, bringing the total tax bill to £246,000," Young noted.
Making a wedding gift after the big day
Marriage gifts carry their own allowances: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else, which can be combined with the annual exemption. But Young pointed out that the gift must be made before the ceremony and the wedding must go ahead.
"Anything over the wedding limit or made after the marriage itself will become a potentially exempt transfer," she said. "But combining the rules could mean up to £24,000 can be given between two parents to their child and their soon-to-be spouse."
Overlooking gifts from surplus income
Gifts from regular income, rather than investment sale proceeds, can be made free of IHT with no upper limit, provided they don't reduce the donor's standard of living. Young noted a pensions angle too: money gifted towards a family member's own pension contribution can earn them tax relief while sitting outside the donor's estate.
Although proving the gifts met the conditions falls to the donor, those administering the estate need to complete any IHT paperwork after the donor's death, making records essential.
"You can help by keeping evidence of your income, showing that you're not having to cut back on your normal spending to make the gifts, and making sure they know where to find those records," Young said.
"Getting hold of bank statements and other records can be difficult without probate and IHT usually needs to be settled before probate is granted. It might seem onerous, but the value of the IHT exemption certainly makes it worth it."
Not writing life cover in trust
Life insurance can fund an IHT bill if the donor dies within seven years of a gift, but payouts, including employer-provided cover, can count towards the estate unless the policy sits in trust.
"Writing policies in trust removes the payout from your estate and protects the IHT status of the gift you've made," Young said. IHT normally must be settled within six months and before probate is granted, so a trust can spare a family from selling assets to cover the bill.
Misunderstanding charity legacy gifting rules
Estates leaving at least 10% of their 'net estate' to charity qualify for a reduced 36% IHT rate, but a poorly drafted will can mean this is missed. The 10% test applies to the baseline amount: the estate's value after reliefs, debts, funeral costs and the standard nil rate band.
"A common mistake is to also deduct any residence nil rate band here, which incorrectly shrinks the baseline amount and makes it appear as if the required charity legacy is smaller," AJ Bell's senior pensions and savings expert said.
Young added that anyone with a 10% charitable clause should review it ahead of the April 2027 pension changes, alongside pension nominations and wider estate plans, since pension beneficiaries sit outside the will despite the pension pot now counting towards the estate.