Can you afford to give away wealth to cut your IHT bill?

One of the most straightforward ways to cut the amount of tax your loved ones pay when you die is to give your wealth away, while you are still alive.

So-called lifetime gifts or living inheritances have two key benefits. First, it means that your family gets the full value of your gift now, rather than losing 40% to the taxman when you die (which reduces a £10,000 bequest to £6,000). Second, is that it means you get to see your family benefit from your wealth when they really need it. Your gift could put a grandchild through university or give them a leg up on to the property ladder, support a family member going through a difficult time or help adult children build their future financial security.

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And such generous gestures are only expected to become more common. Anecdotal reports from financial advisers suggest that clients have shown increased interest in gifting, following the announcement that pensions will form part of your estate from April 2027 – and subsequently subject to inheritance tax (IHT).

In addition, IHT receipts hit £0.8 billion in April 2025, according to HMRC, almost £100 million higher than the same month last year.

However, before you give away any of your wealth, it’s important to do your due diligence. Here’s six things you need to think about.

1) Do you actually have an IHT liability?

IHT is a deeply unpopular tax; levied on grieving families, it sparks anger and frustration in a way that other taxes don’t.

But despite the emotive rhetoric associated with IHT, there is still some confusion around the tax. According to a survey from Just Group at the end of 2023, 59% of over-55s did not know the threshold for IHT.

Currently everyone can pass on an estate worth £325,000 tax free – this is the nil rate band (NRB). However, in practice many families can pass on much more. For example, if your estate includes a family home that is being passed on to direct descendants – such as children or grandchildren – you can use the residential nil rate band (RNRB) to pass on a further £175,000, giving you a total tax-free allowance of £500,000.

Married couples and civil partners can also pass on assets to each other when they die tax free and combine their remaining allowances to pass on a maximum of £1 million between them.

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2) Can you afford to give money away?

Even if you think you’ll have an inheritance tax liability, it’s still important to consider about how much money you will need for a comfortable retirement. This is particularly important if a sizeable chunk of your wealth is tied up in property or pensions and cannot be accessed quite so easily, or without incurring a tax charge.

Even if you’ve got liquid assets, such as savings or investment accounts and individual savings accounts (ISA), that you don’t have an immediate need for, you still need to consider whether you can afford to give that money away.

Spending in retirement often starts high but tails off as you get older and your health deteriorates. However, it can pick up again in the final years of your life, if you need care.

According to analysts LaingBuisson, the average residential care home now costs £1,278 a week, while one in seven independent nursing homes costs over £1,800 a week.

It’s also important to note that giving away wealth to avoid a care bill is a high-risk strategy – it could be regarded as a deliberate deprivation of assets by your local authority and mean the money needs to be clawed back to cover your costs.

3) Are you in good health?

Your health is a vital consideration when you’re thinking about IHT - and it’s not just about whether you’ll have a care bill to pay.

If you’re in rude health, you need to consider that you may live longer than you expect and require more money as a result. A 75-year-old male today will typically live to age 88, according to the Office for National Statistics (ONS), but has a one in four chance of reaching 93 and a one in 10 chance of reaching 98. A woman of the same age today, can expect to live a further 15 years and reach age 90. However, there is a one in four chance they will live to 95 and a one in 10 chance they will celebrate their 100th birthday.

When you make larger lifetime gifts that aren’t covered by a tax-free allowance, such as the £3,000 annual exemption or regular gifts from surplus income, it’s also important to be aware that gifts will only become wholly tax-free if you survive a further seven years after making the gift.

This means timing is important. You’ll want to make gifts while you’re in good health and can reasonably expect to live for another seven years, but equally you don’t want to make gifts too soon and risk spending money you might come to need.

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4) Are you happy to lose control of your money?

A very important consideration for many people is what will happen to their money once they have given it away. As soon as you hand money over, you’ll lose control and won’t have any say over how it’s spent.

This can be particularly important if your beneficiaries are in a financially vulnerable position, for example if there is a risk of bankruptcy or divorce. In both cases your money might not end up where you planned.

Where gifts are made to younger people, you may also be concerned that they aren’t mature enough to manage the money well.

One way to take more control over gifts is to place money into a trust instead of gifting it directly to beneficiaries. A discretionary trust, for example, would let you get money out of your estate (so long as you live another seven years), but give you more control over who receives your money and when.

However, this will come at additional cost as, due to the complexity of trusts, you’ll need to seek professional advice first.

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5) Have you spoken to your family?

If you’re planning on giving away sizeable sums, it’s also a good idea to discuss your thoughts with your family. This can be helpful in terms of working out who would benefit and when.

A larger gift, for example, to older adult children could exacerbate a brewing IHT liability for them. Alternatively, they may want you to hold off if they are worried that their marriage is on the rocks.

By having open conversations with your beneficiaries, it will also be easier to avoid any problems further down the line, in case there are any concerns about fairness that you might not have considered.

6) Have you taken professional advice?

While it might look easy to avoid IHT on paper, with it once described as a voluntary tax, the reality is that successful estate planning can be pretty complicated and the price of getting it wrong can be high.

This means it’s essential to get advice from a regulated financial planner, preferably one who specialises in estate planning.

A good planner will be able to help you accurately work out your potential IHT bill and, by using cash flow modelling, work out how much money you need to live on and what you can realistically afford to give away. If your family dynamics are tricky, they can also offer practical advice and provide an experienced sounding board for your ideas.

Equally, a financial planner can also help you work out whether gifting is the right approach for you and can advise on alternative solutions that could be more appropriate.