The amount of inheritance tax charged on gifts, year by year – and how to give money tax-free

HMRC data shows collected IHT soared to £3.1 billion between April and July 2025, a 7% rise year on year.

Analysts warn this rise will continue, with projected annual receipts of £9.1 billion in 2025/26, surging to over £14 billion by 2029/30 moneyweek.com reported.

While asset values continue to climb, the main Inheritance Tax thresholds remain frozen. The standard nil-rate band has been fixed at £325,000 since 2009; according to our latest analysis, if this threshold had risen in line with inflation, it would have reached £523,000 for the 2025/26 tax year. This 'fiscal drag' means that a record number of families are now falling into the IHT net simply due to the rising value of their family home.

The Treasury has officially confirmed that unspent pension pots will be brought into the inheritance tax net starting April 6, 2027. This major policy shift removes the previous exemption that allowed pensions to be passed on tax-free.

Additionally, following the Autumn Budget, Chancellor Rachel Reeves has significantly reduced IHT relief for agricultural and business estates; from April 2026, the 100% relief will be capped at the first £1 million of assets, with any value above this taxed at an effective rate of 20%.

This has led more people to look at ways to give their wealth away tax-free, or with lower tax.

How to gift money tax-free

Gifting

Practically the only way to hand over cash without pushing it into the IHT net is to use lifetime gifting, but even here, rules and timing matter.

You can only gift £3,000 a year (in total, rather than £3,000 to one child and £3,000 to another child) and the donor must live for seven years after the gift was made.

If they don’t, the amount of tax owed is dependent on how much time has lapsed, with liability tapering down as time goes on.

The 'seven-year rule' remains the primary mechanism for large gifts. But there are whispers that the Autumn Budget may tighten these rules or introduce lifetime caps on tax-free gifts.

Regardless of the new rules that may come in, it's vital to keep records of dates and amounts meticulously.

Small gift exemption

You can make multiple annual gifts of up to £250 per person, tax-free, provided the recipient hasn’t already received part of your £3,000 annual allowance in the same year.

For example, you could give £250 to each of your grandchildren each year - without affecting your main annual exemption.

Wedding or civil-partnership gifts

Tax-free gifts can also be made in celebration of weddings (or civil partnerships), with limits based on your relationship to the recipient: £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.

These gifts are effective only if made before the wedding, and they don’t count towards the £3,000 annual exemption - but they cannot be combined with the £250 small gift allowance.

Gifts from surplus income

If you have sufficient income to maintain your standard of living, you can regularly give away money from your surplus income, and those gifts are immediately exempt from IHT.

These could be regular payments such as school fees, contributions to a child's savings, rent, or care costs for a dependent.

However, this exemption comes with conditions: the gifts must be regular, from income (not capital), not jeopardise your lifestyle, and you must keep meticulous records.

Deed of variation

Another powerful tool is the deed of variation. Within two years of death, beneficiaries can redirect gifts - for instance, to grandchildren or into trusts - treating the gift as if made by the deceased.

This can trim IHT dramatically, in some cases, with Money Week even reporting some have saved six-figure sums.

Give money to charity

Charitable giving remains a generous option: leaving at least 10 per cent of your estate to charity can reduce the IHT rate from 40 per cent to 36 per cent.

Transfers between spouses or civil partners

Transfers of assets to a UK-resident spouse or civil partner are exempt from IHT, regardless of value.

And, any unused nil-rate band (currently £325,000) can be transferred to the surviving partner, potentially doubling the tax-free allowance (up to £650,000 between spouses).

Residence Nil-Rate Band (RNRB)

The Residence Nil-Rate Band (RNRB) is an extra inheritance tax allowance that applies when you pass on your home - or the proceeds from selling it - to direct descendants such as children, step-children, foster children, adopted children or grandchildren.

The allowance is currently up to £175,000 per person. This means, in addition to the standard nil-rate band of £325,000, an individual can potentially pass on £500,000 tax-free if their estate includes a qualifying home left to direct descendants. For married couples and civil partners, any unused allowances can be transferred, allowing them to pass on up to £1 million tax-free between them.

There are conditions. The RNRB only applies to one residential property that has been used as a home by the deceased, and it must be “closely inherited” by direct descendants. Estates worth more than £2 million begin to lose the allowance, tapering away at a rate of £1 for every £2 above this threshold.

For example:

The RNRB was introduced in April 2017 to help families pass down the family home without triggering as much inheritance tax liability.

Tax treatment depends on your individual circumstances and may be subject to change in the future. This article does not constitute any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any financial decisions.

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