What high-net-worth individuals need to know when passing wealth to the next generation
Gifting can be a powerful way to transfer wealth during your lifetime, helping family members, reducing Inheritance Tax (IHT) exposure, and giving you the satisfaction of seeing your support put to use.
But the UK gifting rules are not always intuitive. While some allowances are simple and automatic, others require structure, documentation, or long-term planning to be effective.
This short guide outlines the key exemptions and strategies available, tailored to individuals with substantial estates who are seeking clarity and control.
Annual Exemption: The Foundation of Tax-Free Gifting
Each individual can gift up to £3,000 per tax year, free from IHT.
- This is known as your annual exemption.
- If unused, you can carry it forward one year, allowing a gift of up to £6,000 in total.
- Gifts must be made outright, not contingent on repayment or benefit to the giver.
Small Gifts: £250 per Person
In addition to your annual exemption, you may give £250 per person, per tax year to as many individuals as you like.
- These must be to different individuals.
- They cannot be combined with your £3,000 allowance for the same recipient.
This is often used for birthday or holiday gifts across a wider family.
Gifts on Marriage or Civil Partnership
Certain one-off gifts made in celebration of marriage or civil partnership are exempt from IHT:
- £5,000 for a child
- £2,500 for a grandchild or great-grandchild
- £1,000 for any other person
These can be used in addition to your annual exemption in the same year.
Regular Gifts from Surplus Income
Perhaps the most overlooked exemption. You can make regular gifts from surplus income, provided:
- The gifts are habitual (e.g. monthly, annually)
- They come from income, not capital
- They do not reduce your standard of living
This exemption has no upper limit, but you must keep clear records, including proof that the gifts are from income and not impacting your financial position.
This route is especially powerful for clients with strong pension income, dividends, or rental yields.
Larger Gifts: Potentially Exempt Transfers (PETs)
Gifts that exceed your exemptions are classed as PETs. These are free from IHT only if you survive seven years from the date of the gift.
If you die within seven years, the gift may be taxed, depending on its value and the total of previous gifts.
- Taper relief applies from year three onwards, reducing the rate of IHT gradually to 0% at year seven.
- PETs can complicate the IHT calculation if not properly documented or disclosed.
Note: Henry Dannell does not provide tax advice. All PET strategies should be reviewed with a qualified tax adviser.
Gifts with Reservation of Benefit: What Not to Do
If you give an asset, such as a property, but continue to use it or benefit from it (e.g. living in a house rent-free), the gift will still be counted as part of your estate for IHT purposes.
This is known as a Gift with Reservation of Benefit (GROB) and is a common source of confusion.
It is possible to resolve this by paying market rent or removing the benefit entirely, but this requires careful planning.
Trusts and Structured Gifting
Trusts can be used to gift assets while retaining a level of control or oversight, especially where:
- Beneficiaries are minors
- You wish to ring-fence funds for specific purposes (e.g. education, housing)
- Your estate value risks breaching the nil-rate band and you wish to remove capital gradually
Trusts are subject to their own IHT rules, including a nil-rate band every seven years and potential exit and periodic charges.
When combined with life insurance or surplus income gifting, trusts can play a central role in tax-efficient legacy planning.
Keep Records
Whichever gifting strategy you pursue, documentation is critical.
- Maintain written records of what was gifted, when, to whom, and under which exemption.
- Keep supporting documents for surplus income calculations if relevant.
- Update your Will, Letters of Wishes, and any trust deeds to reflect ongoing gifting.
Executors may be asked to account for these gifts when settling your estate. Clarity now will prevent confusion later.
At Henry Dannell, we work closely with clients, tax advisers, and legal professionals to align gifting strategies with estate structure, liquidity planning, and long-term financial independence.
If you are considering how gifting fits into your overall wealth plan, we would be pleased to offer a tailored conversation, discreetly, and with the foresight it deserves.
Please note: tax treatment is based on individual circumstances and may be subject to change in the future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Please also note: the Financial Conduct Authority does not regulate will writing, inheritance tax planning, and trust planning.
