Gifting Money Before Death: What You Need to Know

Every tax year you can give away up to £3,000 in total free of inheritance tax, known as the annual exemption. If you did not use it last year, you can carry forward the unused amount for one further year, giving a potential £6,000 exemption in a single year if the previous year's allowance was untouched.

Separately, you can give up to £250 to as many individuals as you like each tax year, provided you have not already used another exemption on the same person. Wedding or civil partnership gifts also have their own limits: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.

One of the more generous but less well known exemptions covers gifts made regularly out of your surplus income, rather than your savings or capital, provided the gift does not reduce your standard of living. There is no upper limit on this exemption, which makes it useful for people with a comfortable pension or investment income who want to support family regularly.

The key is documentation. HMRC will want evidence that the gifts were regular, made from income rather than capital, and left you with enough to maintain your usual standard of living. Keeping a simple record each year, showing income, outgoings and gifts made, is essential if your executors are to claim this exemption after your death.

Gifts above the annual exemptions are potentially exempt transfers. They fall out of your estate for inheritance tax purposes entirely if you survive seven years, with taper relief reducing tax due on the sliding scale between three and seven years if you do not. See our guide on the seven year rule for the full detail on how this works.

Because the outcome depends on how long you live, gifting large sums purely to save tax carries genuine uncertainty. It is a decision best made alongside your overall financial plan, not in isolation.

The most important practical rule with lifetime gifting has nothing to do with tax: never give away more than you can comfortably afford to lose access to. Life expectancy, care costs and unexpected expenses are all impossible to predict precisely, and gifts, once made, are usually irreversible.

If later needs mean you require means-tested local authority support for care, and a deliberate gift is judged to have been made to avoid paying for that care, the local authority can treat it as 'deprivation of assets' and assess you as if you still owned it. This is a completely separate set of rules from inheritance tax and catches people out regularly.

Gifting during your lifetime to one child but not another, even for good reasons such as a house deposit, can create tension if not discussed openly or reflected sensibly in your will. Consider whether lifetime gifts should be balanced by adjustments to what each person eventually inherits, and whether it is worth explaining your reasoning to family while you are able to.

A letter of wishes alongside your will, which is not legally binding but can explain your thinking to family and executors, is a useful place to record why gifts were made unevenly during your lifetime.