Inheritance Tax (IHT) has dominated the news cycle in recent years, especially after chancellor Rachel Reeves announced that pensions would be subject to IHT from April 2027.
Now, as we approach the Budget on 26 November 2025, there is much speculation about further changes to IHT.
As such, you may want to explore ways to reduce the IHT that your beneficiaries pay, so they retain more of your estate when you pass away.
Gifting wealth while you’re alive can be an effective way to achieve this. However, the rules are complex, and these three myths could lead to mistakes that result in an unexpected tax charge.
1. All gifts you make are automatically free from Inheritance Tax
In some cases, when you gift wealth to your beneficiaries, those funds fall outside your estate for IHT purposes. However, it’s a misconception that all gifts are automatically free from IHT.
Gifting allowances and exemptions
In 2025/26, you have an annual gifting allowance of £3,000. This means the first £3,000 you give each year is automatically IHT-free. This is a personal allowance too, so you and a partner could gift a total of £6,000 between you.
You also have a separate allowance when gifting wealth to pay for a wedding. You can give:
- £5,000 to a child
- £2,500 to a grandchild or great grandchild
- £1,000 to anybody else.
This allowance is also a personal one, so you and a partner can both benefit from it.
Beyond your annual gifting allowance and gifts for weddings, there are other exemptions you might take advantage of, including:
- The small gifts rule – You can give gifts of up to £250 to as many people as you like.
- The gifts from surplus income rule – Regular gifts may be IHT-free provided they meet certain criteria.
- Gifts to a spouse or civil partner – All gifts to a spouse or civil partner are immediately IHT-free.
- Charitable gifts – All gifts to charity are IHT-free. Also, the rate of IHT falls from 40% to 36% if you leave at least 10% of your estate to charity.
These exemptions are complex and it’s important that you fully understand the rules to ensure you don’t accidentally trigger a tax charge.
Potentially exempt transfers and the “seven-year rule”
Any gifts you give that don’t fall into one of the exemptions listed above are potentially exempt transfers (PETs).
These gifts are IHT-free if you live for seven years after giving them. This is known as the “seven-year rule”.
However, if you pass away before reaching this seven-year threshold, there may be some IHT to pay. The amount that your beneficiaries pay is calculated on a sliding scale known as taper relief.
| Years survived after giving the gift | Rate of IHT payable |
| 0 to 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7+ | 0% |
Source: MoneyHelper
We can help you understand the interplay between the various allowances and exemptions, and how the seven-year rule affects you, so you can be as tax-efficient as possible.
2. You can reduce Inheritance Tax on your home by passing it to loved ones while you’re alive
Your home is likely one of your largest assets, so you may look for ways to reduce IHT when passing property to the next generation.
Based on the gifting rules outlined above, you might assume that you can pass ownership of the home to your loved ones while you’re alive and reduce IHT, provided you live for seven years afterwards.
However, this isn’t necessarily the case, as a specific rule applies in this scenario.
If you pass ownership of a home to somebody else but continue living there, it’s considered a gift with reservation of benefit. You are still benefiting from the asset because you live in the property, and so IHT still applies as normal.
Conversely, if you paid rent at current market rates, the property might be considered a PET and would become IHT-free after seven years. However, this may not be the most efficient way to pass wealth to your loved ones and could affect your short-term financial position.
3. Placing assets in a trust shields gifts from Inheritance Tax
Trusts can be an effective IHT-planning tool, but they are not as straightforward as you may assume.
A trust is a legal arrangement that allows you to pass ownership of assets to somebody else, who then manages them on behalf of a third party.
So, instead of gifting wealth directly to your children, you might place it in a trust. The terms of the trust give instructions about how and when they will receive the funds. This could be after you pass away, or when they reach a certain age.
While there are certain IHT benefits, it’s a myth that all assets in a trust are completely IHT-free.
Instead, if transfers into a trust exceed the “nil-rate band” – the amount you can pass on before triggering an IHT charge – then some IHT may be payable. For the most common types of trust, such as a discretionary trust, this charge is paid when gifting the asset, and the rate is 20% rather than 40%.
This means you might reduce IHT but likely won’t circumvent it altogether.
Also, if you pass away within seven years of placing assets in a trust, the full 40% IHT may be payable.
Further to this, there is IHT to pay every 10 years after gifting assets to a trust. This is normally up to 6% of any value that exceeds the nil-rate bands.
While these basic rules apply, there are many variations depending on the type of trust used, the value of the assets, how long they remain in trust, and when you pass away.
If managed incorrectly, trusts could lead to a much higher IHT bill than expected. As such, it’s crucial to seek specialist legal advice from a trust expert.
Get in touch
We can help you navigate the complex IHT gifting rules to create an estate plan that works for your family.
Please get in touch or email us at advice@mlifa.co.uk for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients 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, tax planning or trusts.
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.