Understanding the thresholds, strategy, and property-linked planning in today’s IHT landscape
For many homeowners in their 50s and beyond, the question of passing wealth to the next generation is no longer hypothetical; it is both a practical and a philosophical decision. With rising property values, changing family structures, and an increasingly scrutinised tax environment, gifting has become a cornerstone of inheritance tax (IHT) planning. But the rules surrounding what you can gift, and when, are often misunderstood.
This article unpacks the thresholds, explores strategic considerations around lifetime gifting, and outlines how gifting can work in tandem with property and trust structures to shape long-term financial legacies.
The IHT Landscape: Why Gifting Matters
Inheritance Tax currently applies at a standard rate of 40% on estates exceeding the applicable thresholds. As of 2025, the nil-rate band remains at £325,000 per individual, with an additional £175,000 residence nil-rate band available when passing a main residence to direct descendants. For a married couple or civil partners, this can mean up to £1 million of their combined estate is potentially exempt.
Yet for many households, particularly those with property wealth concentrated in London or the South East, these allowances can be quickly surpassed. Gifting during one’s lifetime can mitigate future IHT liabilities, but to be effective, such strategies require both timing and structure.
Annual Exemptions: The Basics
Certain gifts are immediately exempt from IHT, regardless of when they are made. These include:
- Annual exemption: You can gift up to £3,000 each tax year without incurring IHT. If unused, this can be carried forward for one year only.
- Small gifts: You may give up to £250 to as many individuals as you wish each tax year, provided the recipient hasn’t also benefited from the annual exemption.
- Wedding gifts: Parents can gift up to £5,000 for a child’s wedding, £2,500 for a grandchild or great-grandchild, and £1,000 to anyone else, all free of IHT.
- Regular gifts from income: Perhaps one of the most underused exemptions, gifts made as part of regular expenditure from surplus income that do not affect your standard of living can be IHT-free, regardless of amount.
These allowances, while useful, are modest in isolation. Larger gifts require more detailed consideration.
Potentially Exempt Transfers (PETs)
Gifting larger sums, say, £100,000 to help a child with a property purchase, falls under the category of a Potentially Exempt Transfer. If the donor survives for seven years after making the gift, it is exempt from IHT. However, should they die within that window, the gift is brought back into their estate for IHT purposes.
Where the gift exceeds the nil-rate band, taper relief may apply from year three onwards, gradually reducing the IHT liability. Importantly, tapering applies to the tax on the gift, not to the value of the gift itself.
This is where strategic timing and record-keeping become crucial. It is advisable to keep documentation of when and to whom gifts were made, including the source of funds and whether these came from capital or income.
The Role of Property in Gifting Strategies
Property is often the most significant source of family wealth. However, gifting property brings added complexity. Transferring ownership to children during your lifetime is possible, but may trigger other taxes:
- Capital Gains Tax (CGT) may apply if the property is not your main residence.
- Stamp Duty Land Tax (SDLT) can apply to the recipient if there is any mortgage transferred as part of the gift.
- If you continue to live in the property without paying full market rent, the gift could be treated as a ‘gift with reservation of benefit’, meaning it remains within your estate for IHT purposes.
Where appropriate, clients may consider placing property within a trust structure, particularly for second homes or investment property. This introduces a separate set of tax considerations, including potential entry charges if the value exceeds the nil-rate band, but it can offer long-term control and protection of assets.
Trusts and Family Wealth
Trusts can be an effective tool for families wishing to pass down wealth while retaining an element of oversight. Discretionary trusts, in particular, allow for flexible distribution and can protect from future relationship breakdowns or creditor claims.
There are broadly two IHT implications for trusts:
- Gifts into trust are immediately chargeable at 20% if they exceed the nil-rate band.
- Ongoing trust charges apply every ten years (the ‘periodic charge’) and when capital leaves the trust (the ‘exit charge’).
These charges are manageable in many cases, particularly where the structure supports wider family governance or asset protection aims. However, trusts should be established with full legal and tax advice, and reviewed periodically to remain compliant and effective.
Strategic Gifting: More Than Just Tax
Beyond exemptions and allowances, effective gifting requires alignment with your broader financial picture. Key considerations include:
- Liquidity: Will you have sufficient income or capital after the gift to maintain your lifestyle, fund care needs, or respond to market changes?
- Fairness: Is the gift equitable among children or grandchildren, and if not, have you documented your reasoning to minimise potential disputes?
- Control: Would a structured vehicle (such as a trust or a loan arrangement) allow you to assist your family while retaining a degree of oversight?
At Henry Dannell, we often support clients in aligning lifetime gifting with their wider financial architecture, from refinancing property to release equity, to coordinating gifting with long-term mortgage or wealth strategies.
The Case for Early Planning
While the technical aspects of IHT gifting may appear daunting, the broader message is clear: acting early opens up greater opportunity and flexibility. Leaving matters too late often leads to hurried decision-making under less favourable conditions.
Crucially, we are not tax advisers, and any specific tax actions should be discussed with a qualified tax professional. However, our role is to work alongside your legal and financial team to ensure the liquidity, timing, and structuring of your plans support your long-term intentions.
Final Thoughts
Gifting can be a powerful act, financially, emotionally, and strategically. But the most effective gifting is never reactive. It is considered, planned, and integrated within a clear financial framework.
If you are considering gifting to children or grandchildren, whether to assist with property, education, or simply to reduce the value of your estate, we would be pleased to explore how this can be approached with clarity and confidence.
To arrange a conversation with a Henry Dannell adviser about lifetime gifting, IHT planning, or property-based strategies, please do get in touch.