Giving money to your children or grandchildren during your lifetime is a legitimate and highly effective way to reduce Inheritance Tax. But the rules are strict, and the infamous “7-year rule” catches a lot of families out.
The basics
Most lifetime gifts are classed as “Potentially Exempt Transfers”. If you live for seven years after making the gift, it falls completely outside your estate for IHT. If you die within seven years, tax may still be due, but tapering relief reduces the rate after the third year.
Annual allowances you should use
Everyone has a £3,000 annual gifting allowance that falls outside the 7-year rule entirely. Small gifts of up to £250 per person, wedding gifts, and regular gifts out of surplus income are also exempt. Used consistently, these allowances alone can meaningfully reduce an estate.
Watch out for gifts with reservation
Gifting your home to your children while continuing to live in it rent-free doesn’t work for IHT purposes. HMRC treats it as if you still own it. A structured plan avoids these traps.
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