April saw a host of changes to inheritance tax (IHT) in Britain. So divisive were they that it was hard to avoid the headlines, among them being business and agricultural assets no longer capable of benefitting from 100% relief. From the start of the 2027/28 tax year, a further significant change will occur, with pensions becoming subject to the IHT regime.
As a result, families across the UK are increasingly feeling pressure to pass on assets during their lifetime in an effort to reduce the potential impact of IHT. And while this can be an effective way of transferring wealth, there is an uncomfortable reality: gifting is not the simple solution many assume.
If done in haste, what is intended as generosity can instead become a tax burden for the very people you are trying to help.
Often referred to as the “Bank of Mum and Dad,” family support is now an established part of modern financial life. I see this play out in very human ways with parents helping children avoid years of renting, or grandparents wishing to see their grandchildren settled, often with the added expectation of reducing their estate for IHT purposes.
As younger generations rely more on family support to access the property ladder, lifetime gifting has become increasingly common. However, the tax system does not take intention into account, and well-meaning decisions can lead to unintended consequences.
The seven-year trap
One of the most common misconceptions I see is around the “seven-year rule”. In simple terms, if you give assets away and survive for seven years, those gifts will usually fall outside your estate and won’t be subject to inheritance tax.
However, as morbid as it is to think, if you die within that period, those gifts can still be included in the inheritance tax calculation. And crucially, the liability does not always fall where families expect.
This often arises with lump sum gifts to help children buy their first home. In the wrong circumstances, the child you supported could personally face a tax bill years later, long after the money has been spent on the very home it helped to buy. Depending on the overall lifetime gifting position, the recipients of smaller gifts may also personally face an inheritance tax bill.
While reliefs exist, such as taper relief, these are limited and apply only in specific situations – and what is commonly misunderstood is that this relief is only applied when there is tax payable on the gift by the recipient, not universally to all gifts.
Depending on the timing of the gifts, you may also find that one child is taxed on a gift while another is not. Unless there are balancing provisions in a will that take account of tax on lifetime gifts, this could mean that one child benefits overall to a far greater extent than other children – even if the overall amounts gifted in life are the same.
Then there is the ‘asset-rich, cash-poor’ estate: a portfolio of property, land or other illiquid holdings, but limited ready money. A large lifetime gift can look sensible on paper, yet if death follows within seven years the tax bill can arrive when the estate is tied up – leaving families scrambling for liquidity or forcing sales on an unhelpful timetable.
Families do have options beyond simply giving money away. In many cases, the starting point is understanding their overall position – what their estate is worth, what the potential inheritance tax exposure might be, and what they can realistically afford to do.
Some may look at making regular gifts out of surplus income, provided this is done carefully and documented properly. Others may consider trust structures where there are concerns around control or how assets might be used.
There is no one-size-fits-all solution. The right approach depends on individual circumstances, and taking advice early can open more options rather than limiting them later.
When simple gifting isn’t so simple
If you choose to gift regularly, I would give one piece of advice: document everything.
One common pitfall is the well-meaning plan to “give regularly” without applying a proper structure. There is a valuable exemption for gifts made from surplus income, but it is not something you can claim unless a clear structure of gifting can be shown that meets the legal requirements. This is best established and planned for during a person’s lifetime and is helped by maintaining clear and comprehensive records.
HMRC requires clear evidence that the gifts form part of normal expenditure, are made from income (not capital), and still leave you with enough to maintain your standard of living.
I have witnessed this play out in reality, while working with a family who had been making regular payments to children and grandchildren for years, assuming these would naturally fall within this exemption. When it came to reviewing the estate, there was no clear record of intention or affordability. What they saw as consistent support, HMRC could just as easily view as a series of potentially taxable gifts.
A person’s income position may well change over time, affecting the affordability of such regular gifts. For example, a higher earner who makes substantial standing-order gifts may assume that this is part of their “normal expenditure”. Later, income becomes irregular (bonus falls, business profits dip, investment income changes), and the paper trail doesn’t clearly show surplus or consistency of intent. Executors may then struggle to prove the exemption, resulting in a possible expensive and stressful HMRC challenge.
If you cannot demonstrate the requirements, what you thought was exempt may instead be treated as taxable. This is why record-keeping is not optional. If your executors are left guessing, your family may find itself navigating HMRC forms, bank statements and uncertainty at an already difficult time.
Financial planning first
Before making any decisions around gifting, the starting point should always be your own financial security.
In practice, I often see two extremes. At one end, there are those with substantial estates who feel they cannot afford to make any gifts, often driven by concerns around future care costs or “what if” scenarios that may never arise. In reality, many are in a stronger position to begin succession planning than they realise, while arguing they cannot afford it.
At the other end, there are those keen to help family now, but whose financial position doesn’t support the level of gifting they have in mind. I have seen situations where, for example, a client wanted to gift their home to their child without fully considering how they would fund their own housing or maintain their standard of living afterwards. In circumstances such as these, it is also common for there to be concerns about a client’s longer-term security in having a home. Understanding what you can genuinely afford, often through financial advice and modelling, is the first step to estate planning. It’s not just about reducing future tax bills, but about making decisions that work for you now and protecting your long-term financial wellbeing.
Check your will, then check it again
It is always worth taking the time to review your succession planning. As a general rule, people regardless of size of estate, should look at their will every five years or so. It may be that no changes are needed, but circumstances can shift significantly over that time.
On the topic of gifting, a significant lifetime gift to one child, followed by an unchanged will, can unintentionally create inequality. What many do not realise is that lifetime gifts are not automatically taken into account later. Without updating a will, one child may benefit both during lifetime and again on death, creating an imbalance that was never intended.
Across the UK, succession can also be materially affected by the way property is owned. In Scotland, this most commonly arises where title includes a survivorship destination, while in England & Wales it arises where property is held as joint tenants. I frequently see clients assume that an asset will fall into their estate on death and that any imbalance created by lifetime gifts can be corrected through the provisions of their will. That assumption can be problematic. Ownership arrangements of this kind operate entirely outside the will, with the property passing automatically to the surviving co-owner and bypassing the estate altogether.
It’s also good practice to revisit your will following any major life event, such as marriage, divorce, or the birth of a child or grandchild, to ensure it still reflects your current situation and intentions.
The earlier this is considered, the more options tend to be available. In some cases, that might involve using trusts or passing on capital earlier so it can grow outside of the state for future generations.
So, what should families do now?
As I often say, while there may be a clear pressure to act, rushing into gifting without proper advice can create unintended problems, not just for you, but for your family.
The answer is to take a step back and gain clarity. Understand what your estate looks like today, what the potential tax exposure might be, and what you can genuinely afford to do.
For some, that will involve reviewing a will, speaking to a financial adviser, or sense-checking plans with a tax specialist. For others, it may simply confirm that what they already have in place is appropriate.
A version of this article was featured in Farming Scotland