Inheritance Tax (IHT) is a growing concern for many families, with the UK government introducing a series of reforms that have made it increasingly difficult to reduce exposure to IHT.
Significant changes to Business Property Relief (BPR) and Agricultural Property Relief (APR) took effect from 6 April 2026, fundamentally changing these reliefs. From that date, 100% relief is capped at the first £2.5 million of combined qualifying business and agricultural property per individual, with only 50% relief available on any value above that threshold. AIM shares are now restricted to 50% BPR only, with no access to the 100% allowance. They do not therefore, consume any of the £2.5 million allowance, leaving that allowance fully intact for other qualifying business or agricultural assets. These changes mean that BPR and APR can no longer shelter unlimited value from IHT as they once could.
Looking ahead, from 6 April 2027 most unused pension funds and pension death benefits will also be brought within the value of a deceased person's estate for IHT purposes. Together, these reforms make it increasingly difficult to shelter assets from IHT.
However, one area that often goes unnoticed is simply making use of your tax-free annual allowances. This is particularly important for those with estates that exceed their nil rate band which in the UK, is currently £325,000. When you include the residence nil rate band (£175,000) and any tax-free bands transferred from a deceased spouse, the maximum tax-free amount a death estate can hold is £1,000,000. Making full use of your annual gifting exemptions means those amounts fall entirely outside your estate for IHT purposes, without touching your nil rate band.
For those with estates surpassing these bands, gifting cash can be an effective way to reduce IHT liabilities, but it is important to understand the specific exemptions and allowances that apply under UK law.
Detailed below are the various gifts allowed for the purposes of tax-free gifting. Any cash gifts exceeding these are known as lifetime gifts and are potentially exempt transfers (PETs), meaning they will only become chargeable to IHT if the donor is to die within seven years of the gift. Any gift that is not exempt or a PET is known as a Chargeable Lifetime Transfer (CLT). This most commonly applies to gifts into a Discretionary Trust which can attract an immediate tax charge of 20%.
Gifts that fall outside the scope of IHT
- Annual exemption: Each individual can give away up to £3,000 worth of gifts each tax year without incurring IHT. This exemption can be carried forward one year, allowing a maximum of £6,000 to be gifted if the previous year’s allowance was unused.
- Small gifts exemption: Gifts of up to £250 can be made to any number of recipients each tax year, provided no other gifting exemption has been used in relation to the same person in that tax year. This allows for multiple small gifts to be made without IHT liability.
- Gifts out of income: These gifts must form part of a regular pattern of giving, be made from surplus income after meeting the donor's usual living costs and must not reduce the donor's standard of living. Keeping clear records of income and outgoings is important to support this exemption.
- Gifts for weddings or civil partnerships: There are specific exemptions for gifts made for weddings or civil partnerships, with limits depending on the relationship to the recipient:
- £5,000 from parents to a child
- £2,500 from grandparents or great-grandparents to a grandchild
- £1,000 from anyone else.
- Charitable donations: Gifts made to registered charities are fully exempt from IHT. If at least 10% of the net estate is left to charity, the IHT rate on the chargeable remainder reduces from 40% to 36%.
Cash gifts exceeding these allowances are potentially exempt and can benefit from increasing levels of taper relief, determined by how long the donor survives after making the gift.
The Inheritance Tax seven year rule and taper relief
The below table details the relief and effective tax rates that would be applicable to donors following a lifetime gift in the event of their death. It is worth highlighting that the donor only needs to survive three years to effectively pay a reduced rate of IHT. Taper relief only applies where the value of the gift, when added to other chargeable transfers in the preceding seven years, exceeds the available nil rate band. Where no tax is due on the gift, taper relief does not apply.
| Years between gift and death | Reduction in the tax charge | Effective IHT rate on gift |
| 0-3 | 0% | 40% |
| 3-4 | 20% | 32% |
| 4-5 | 40% | 24% |
| 5-6 | 60% | 16% |
| 6-7 | 80% | 8% |
| 7+ | 100% | 0% |
Used consistently, these exemptions and reliefs can make a meaningful difference to the IHT position of an estate. For more complex estates, options such as Trust structures, whole-of-life cover written in Trust, and charitable giving may also be worth exploring. However, as the rules can be complex, seeking professional advice is often advisable to ensure the most tax-efficient approach.
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