Gifting strategy
The lever that rewards starting early, and only that. Gifts fall out of your estate entirely after seven years, with a taper in between, and some are exempt immediately.
Gifting is the most effective way to reduce an inheritance tax liability, and the one most dependent on time. Give something away and survive seven years, and it leaves your estate entirely.
It is also the lever with the clearest trade-off, and this page will state it plainly: gifting reduces your liability by reducing your control. Once it is given, it is gone — including if you need it later.
How it works
The seven-year rule
A gift falls out of your estate completely once you have survived it by seven years.
The taper
Die between three and seven years after a gift and the tax on that gift is reduced on a sliding scale. Note it tapers the tax on the gift, not the value of the gift — a distinction that catches people out.
The annual exemption
A set amount each tax year that leaves your estate immediately, with one year’s unused allowance able to be carried forward.
Small gifts and wedding gifts
Separate exemptions for small amounts per recipient per year, and larger exempt amounts for gifts in consideration of marriage.
Normal expenditure out of income
The most powerful and least used exemption. Regular gifts made from surplus income, which don’t reduce your standard of living, are exempt immediately with no seven-year wait. It requires a pattern and it requires records.
Gifts to a spouse or charity
Exempt without limit. And leaving 10% or more of your net estate to charity reduces the rate on the remainder from 40% to 36%.
What goes wrong
Gift with reservation of benefit
The classic case: giving the house to the children and continuing to live in it. The property stays in your estate for tax purposes, so you have lost control of your home and gained nothing — while exposing it to their divorce, their creditors and their own estate.
Giving away money later needed for care
Gifting is irreversible. Families who gift too much too early can find themselves dependent on the goodwill of the people they gave it to.
No records
Your executors have to prove what was given and when. Normal expenditure out of income in particular requires evidence of the pattern and of the surplus income. Undocumented gifts are frequently disallowed.
Assuming the annual exemption is the whole answer
On a large estate it barely moves the number. Gifting works at scale or over time, and preferably both.
A note on the figures
Every allowance, threshold and taper on this page is set by legislation and changes. We have deliberately described how they work rather than printing figures that go stale — your Clarity Report applies the current numbers to your situation.
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