Inheritance tax gifting rules: what to give away, when, and the traps to avoid

Episode overview

Inheritance tax used to be a concern for the wealthy. Frozen allowances and a run of rule changes mean it now reaches ordinary families, farmers and business owners, and from April 2027 pensions come into scope too. In this episode of Summing Up, James Shipp is joined by our tax director, Michael Morter, to explain the inheritance tax gifting rules: what you can give away, how the seven-year clock works and the mistakes that catch people out.

Episode summary

James opens by explaining why inheritance tax has changed so much over his career. Allowances have stood still for years, and business assets, agricultural assets and, from next year, pensions have all been pulled into scope. Michael sets out the three big changes from the October 2024 budget: the end of the non domiciled rules in April 2025, the cap on agricultural and business property relief from April 2026, and unused pension funds coming into inheritance tax from April 2027.

The conversation then turns to lifetime gifting. Michael explains the three categories of gift: exempt transfers such as gifts between spouses, gifts to charity and gifts out of surplus income; immediately chargeable transfers, usually into a trust; and potentially exempt transfers to individuals, which become exempt if you survive seven years. He explains how taper relief actually works and why it only helps once you have given away more than your nil rate band.

Two common mistakes follow: forgetting that giving away anything other than cash can trigger capital gains tax, and keeping a benefit in something you have given away, which stops the seven year clock from starting at all. Michael then covers what farmers and business owners can still do after the April 2026 changes, and why pensions being added to the estate can push up the tax on other assets, including the family home.

The episode closes with who can safely leave inheritance tax alone, who needs advice, and one clear message on gifting.

Key takeaways

• Inheritance tax now affects far more people because allowances have been frozen for years and business assets, farms and, from April 2027, unused pension funds are all in scope.

• Lifetime gifts fall into three types: exempt (spouse, charity, surplus income, the £3,000 annual exemption), immediately chargeable (mainly gifts into trust) and potentially exempt (gifts to individuals that become exempt after seven years).

• The seven year clock starts on the date of the gift, so if you have decided you can afford to give something away, the sooner you do it the better.

• Taper relief only reduces the tax where the gifts made in the seven years before death exceed the nil rate band; below that the nil rate band clears the gift first.

• Giving away anything other than cash is treated as a sale at market value for capital gains tax, so take advice before gifting property, shares or other assets.

• If you keep a benefit in something you have given away, such as living in the house or taking the rent, it is treated as never given away and the seven year clock does not start.

• Farmers and business owners can still make lifetime gifts after April 2026, but relief at 100 percent is now limited to £2.5 million per person and the allowances refresh every seven years.

• From April 2027 unused pensions are added to the estate, which can cause the residence nil rate band to taper away and increase the tax on other assets.

• A single person with assets under £500,000 can usually relax. Once a person's assets including pension creep above £500,000, or £1 million for a couple, there is likely to be tax to pay.

Chapters

00:00 Why inheritance tax now affects far more people
02:30 The three big changes since the 2024 budget
06:00 The three types of lifetime gift
10:30 How the seven-year rule works in practice
13:00 Taper relief and the common misunderstanding
14:30 Capital gains tax and reservation of benefit
18:00 Gifting farms and businesses after April 2026
21:00 Pensions and inheritance tax from April 2027
24:30 Who needs advice and the one message to take away?

Guest bio

Michael Morter is a tax director at Lovewell Blake, where inheritance tax planning and compliance is a large part of his role. He advises individuals and families on their exposure to inheritance tax and the options for reducing it, including lifetime gifting, trusts and the recent changes to reliefs for agricultural and business property. This episode is his first appearance on Summing Up and the start of a short series with James Shipp covering gifting, pensions and trusts.

Once pensions are added to your estate, many more families will have inheritance tax to pay. Our tax team can help you understand your exposure and the options for reducing it, from lifetime gifts to trusts.