Britons can gift 'unlimited' amounts to family without paying inheritance tax using little-known rule

Laura Suter, director of personal finance at AJ Bell, has warned that many people risk paying more tax than necessary by failing to use key inheritance tax reliefs before the end of the tax year.

She said: "With the end of the tax year fast approaching, millions of people are at risk of paying more tax than they need to simply by overlooking key allowances and reliefs such as forgetting to use inheritance tax gifting."

Ms Suter explained that missing out on these allowances can have long-term consequences, particularly when it comes to inheritance tax planning.

"Failing to make use of annual gifting allowances means more of your estate could be dragged into inheritance tax later. Small, regular gifts made now can significantly reduce future IHT bills but once the tax year ends, unused allowances are largely lost."

Her warning comes as upcoming changes to pensions are making estate planning more pressing for families across Britain, increasing the importance of using available tax breaks while they are still in place.

Ms Suter highlighted one of the most valuable but often overlooked reliefs, which allows people to give away money without any inheritance tax at all.

"The most generous exemption is for gifts made from regular income, which can be unlimited if they don't reduce the donor's standard of living," she explained.

Despite being one of the most generous inheritance tax exemptions available, it is rarely used. A freedom of information request found that only around two per cent of estates have taken advantage of the surplus income rule.

To qualify for this relief, gifts must meet three clear rules. First, they must be made regularly and follow a consistent pattern, such as monthly or quarterly payments. One-off or occasional gifts do not qualify, so anyone using the exemption needs to commit to ongoing gifting.

Second, the money must come from surplus income rather than savings or other capital. This is a key distinction that HMRC examines closely when assessing estates.

Third, the gifts must not reduce the giver’s standard of living. The rule is designed to ensure people are not leaving themselves short simply to reduce a future inheritance tax bill.

HMRC allows income that has already been taxed to be spent freely, which means neither the person giving the money nor the person receiving it has to pay any additional tax on these gifts.

Keeping clear records is also important. Recording how much was given and when makes it much easier for executors to show HMRC that the gifts met the exemption rules after someone has died.

Figures from Quilter show that just 1,490 estates claimed the exemption over the past three years. That number is expected to rise from April 2027, when Government changes will bring pension death benefits into the inheritance tax system, making this type of planning more important for many families.

"Now pensions will be pulled into the inheritance tax net from April 2027, more people will be taxed on their estates meaning they are increasingly focused on gifting assets to the next generation," Ms Suter noted.

She added a crucial caveat: "The golden rule is not to gift more than you can afford, as you don't want to leave yourself short in retirement."

Beyond the surplus income rule, there are several fixed allowances that allow people to give money away without triggering inheritance tax.

Each person can give up to £3,000 a year tax free. If the full allowance is not used, it can be carried forward for one tax year, meaning an individual could give up to £6,000 in a single year.

Couples can each use their allowance, allowing them to give £6,000 between them every tax year, or more if carry-forward is used.

Wedding gifts are covered by separate exemptions. Parents can give £5,000 to a child who is getting married, while grandparents can gift £2,500 to a grandchild. Other relatives or friends can give £1,000 as a wedding gift without any tax implications.

There is also a small gifts allowance, which allows gifts of up to £250 per person per year to be made tax free, as long as no other exemption is used for the same recipient.

By combining these allowances, parents could potentially give £11,000 in a single tax year without any inheritance tax being due.

Gifts above these limits are still allowed, but they may become subject to inheritance tax if the person making the gift dies within seven years and the total value of gifts made in that period exceeds £325,000, which is the current inheritance tax threshold.