You’ve worked hard to accumulate wealth over the course of your life to enjoy the retirement you want. You also likely want to pass as much of it as possible to your next of kin when the time comes. 

One significant obstacle to this is Inheritance Tax (IHT).

Your loved ones typically pay IHT on any part of your estate above a certain threshold that passes to them when you die. As of 2025/26, these allowances include:

• £325,000 from the base nil-rate band
• £175,000 from the residence nil-rate band.

Any amount above these thresholds typically faces a 40% IHT charge. 

This is why it’s so important to take the necessary steps now to reduce the overall value of your estate. A practical way of doing so is through gifts.

Continue reading to discover how you can use gifts to limit a potential IHT bill for your next of kin.

You can make the most of several practical gifting allowances

It’s important to note that you typically can’t gift unlimited amounts of wealth and still expect it to fall outside your estate. 

However, you can benefit from several clear allowances. Here are three key ones.

1. The annual gifting exemption 

As of 2025/26, the “annual gifting exemption” allows you to give up to £3,000 without it forming part of your estate for IHT purposes.

You can also carry forward any unused exemption from the previous tax year, meaning you could gift up to £6,000 tax-efficiently in 2025/26. 

Since this is an individual exemption, you and your spouse or civil partner could gift up to £12,000 if you both carry unused allowances forward from the last tax year.

This exemption could be particularly useful if you want to make larger gifts over time rather than all at once. For instance, you could use it each year to help a child build a deposit for their first home. 

Over the course of your retirement, this could help you significantly reduce the size of your taxable estate.

2. The small gifts rule

The “small gifts rule” enables you to give as many gifts of up to £250 as you like during a tax year. 

This allowance could be effective if you have a larger family and wish to support several loved ones with smaller contributions. 

For example, you could give each of your grandchildren £250 on their birthdays each year, knowing the gifts won’t count towards your estate.

The main thing to remember is that you can’t use this exemption for anyone who has already received an IHT-free gift from you under another allowance in the same year. 

3. Gifts for weddings or civil partnerships

You can also give tax-free gifts to people getting married or entering a civil partnership. The amount you can give depends on your relationship with the couple. In 2025/26, you could gift:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to anyone else.

When combined with the annual exemption, the wedding allowance could help a loved one reach one of their long-term goals. 

For example, if your child gets married, you could give them £8,000 in the same tax year without creating an IHT liability.

“Potentially exempt transfers” allow you to make much larger gifts, under certain conditions

Aside from these exemptions and allowances, you can also give as much of your wealth to someone as you like and still have it fall outside of your estate for IHT purposes.

For example, you might decide to gift a home to a child or grandchild to help them onto the property ladder.

If you do so, this gift will be classed as a “potentially exempt transfer” (PET). If you live for at least seven years after giving the gift, it usually won’t form part of your estate.

However, if you pass away within three years, the gift is typically taxed at 40% if it exceeds your nil-rate band. 

Meanwhile, if you pass away within three to seven years, the rate of IHT applied to the gift is calculated on a sliding scale known as “taper relief”. The table below shows the different rates of IHT your beneficiaries might pay, depending on how long you survive after making a gift:

It’s vital to remember that PETs are usually the first element of your estate assessed against the nil-rate band. So, taper relief only applies to gifts exceeding the nil-rate band. Otherwise, the gift may not qualify for relief.

Still, PETs could be a practical way to mitigate IHT on your estate.

Many overlook the benefits of making regular gifts from surplus income

Another way to tax-efficiently pass on your wealth that you may not have considered is gifting from your surplus income. 

These gifts can be entirely exempt from IHT, provided they meet certain conditions. 

To qualify, the gifts must be made from your income, not from savings or investments. They also need to be given regularly – either monthly or yearly – and must not negatively affect your standard of living.

For instance, you could use part of your pension income to pay into a grandchild’s savings account every month. Since these payments come from your surplus income, rather than savings, they will typically fall outside of your estate.

Just remember the importance of keeping records of these payments. Bank statements, letters to beneficiaries, or a simple log can help demonstrate that the gifts were both regular and affordable. 

This approach could be particularly practical if you have a steady income that exceeds your needs.

Rather than allowing your wealth to accumulate further, you can pass it directly to your loved ones in a way that exempts it from IHT altogether.

Speak to a professional

We can help you determine the most effective way to pass on your wealth and reduce or avoid a potential IHT bill.

Please contact us now to find out how our Chartered financial planners can support you. 

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.