Six ways gifts can reduce inheritance tax 

Roman Kubiak, Partner and Head of Legacy Protection Services at Hugh James, explains how different gifts can mitigate inheritance tax.


There are a number of ways gifts made both in your lifetime and after death can reduce the amount of potential inheritance tax.

1. Small gift exemption

You can give small gifts of up to £250 per person each year free from inheritance tax, provided that person hasn’t already received any more in that year.

2. Annual exemption

In addition to the small gift exemption, everyone has an annual exemption of £3,000 which they can gift each year. That amount can be carried over to the following year, but only once. This means if you haven’t made any gifts using the annual exemption the year before, you can gift up to £6,000 free from inheritance tax the following year.

3. Gifts on marriage/civil partnership

Gifts can be given on a marriage or civil partnership. The amount you can give that’s free from inheritance tax depends on your relationship to the recipient. Gifts of up to £5,000 can be made to your child, up to £2,500 to a grandchild or great-grandchild and up to £1,000 for extended family or friends.

4. Gifts to charities 

Gifts to charities in Wills are altogether exempt from inheritance tax. And if you give over 10 per cent of your net estate* to charity, you can benefit from a discounted inheritance tax rate of 36 per cent across the remainder of your estate.

This can bring not only the tax payable down significantly but also benefits both loved ones and charities. As such, it can pay to remember a charity.

* Visit for more information about the 36% discounted inheritance tax rate

5. Gifts out of surplus income

If your income exceeds your expenditure, then you might want to think about making gifts from your remaining income. HMRC may scrutinise these gifts to make sure they’re being made from surplus income, instead of capital, and to check that your standard of living hasn’t been adversely affected. As such, it’s worth keeping full records of your income and outgoings, including copies of any tax returns.

6. Gifts from capital

Any gifts you make from capital become exempt from inheritance tax if you continue living for seven years after making these gifts. They are known as potentially exempt transfers or PETs for short.

If you die after three years but within seven years of making a gift from capital, and that gift exceeds your nil rate band, then it may be eligible for what is known as ‘taper relief’. These gifts are taxed on the following sliding scale:

  • Gifts made 3-4 years before death are taxed at 32%
  • Gifts made 4-5 years before death are taxed at 24%
  • Gifts made 5-6 years before death are taxed at 16%
  • Gifts made 6-7 years before death are taxed at 8%
In summary

Gifting can not only be incredibly personally rewarding but, when done properly and with sound advice, can also be a great way of making sure any hard-earned wealth passes to your loved ones and the causes that you care about while having the added benefit of reducing inheritance tax.

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