Millions of families are being dragged into the inheritance tax net as frozen thresholds collide with soaring house prices.
But parents can still legally pass on large sums to their children and others without handing 40% to HMRC through paying Inheritance Tax (IHT).
New forecasts show the number of estates hit by inheritance tax is set to almost double within four years, rising from around 32,200 in 2025–26 to 63,100 by 2029–30, according to the Office for Budget Responsibility.
Yet tax experts warn many families are paying far more than necessary simply because they do not understand the rules around gifting – or act too late.
From modest annual allowances to powerful but little-known loopholes that allow unlimited cash gifts, there are several ways to slash a future inheritance tax bill – even for households with seven-figure estates.
With more parents choosing to help children now rather than leave them waiting until death, so-called “living inheritances” are surging. But get it wrong and HMRC can claw the money back – plus interest.
Here’s how to give money to your children safely, legally and tax-free – and the traps that could cost families tens of thousands of pounds.
Why inheritance tax is catching more families
Inheritance tax is charged at 40% on estates worth more than £325,000, known as the nil-rate band.
If your home is left to a direct descendant – typically a child or grandchild – an additional £175,000 residence nil-rate band applies, lifting the total tax-free allowance to £500,000.
Married couples and civil partners can combine allowances, potentially shielding up to £1m from inheritance tax.
However, the residence allowance is gradually withdrawn once an estate exceeds £2m, pulling more middle-class families into the tax trap.
Giving money away during your lifetime is one of the simplest ways to reduce the value of your estate – provided you understand how HMRC treats gifts.
£3,000 a year: the allowance many parents forget
Every adult can give away £3,000 a year inheritance tax-free.
You can give the full amount to one child or split it between several – and you can carry unused allowance forward for one year.
That means parents who skipped gifting last year could give £6,000 in a single tax year.
There is also a £250 small-gifts allowance per person, per year, which can be given to as many people as you like.
Birthday and Christmas gifts made from regular income are usually covered by this exemption.
Wedding gifts: a generous tax-free boost
Parents can give up to £5,000 to a child as a wedding or civil partnership gift, free of inheritance tax.
Grandparents can give £2,500, while anyone else can give £1,000.
Crucially, the wedding exemption can be combined with the annual £3,000 allowance – meaning a parent could legally give up to £11,000 to a child in a single tax year without triggering inheritance tax.
Seven-year rule on large gifts
Bigger sums fall under the “potentially exempt transfer” rules.
If you survive seven years after making the gift, it falls completely outside your estate and no inheritance tax is due.
If you die sooner, tax may be payable – but the rate tapers after three years. Taper relief only applies once total gifts exceed the £325,000 nil-rate band.
Powerful ‘gifts out of surplus income’ loophole
One of the most valuable – and least understood – inheritance tax breaks allows people to give away unlimited sums, completely tax-free.
The rule applies where gifts are made from surplus income, not capital, and do not reduce the donor’s standard of living.
HMRC figures obtained via a Freedom of Information request show the value of gifts made under this relief surged from £52m in 2022–23 to £144m in 2023–24.
But there’s a catch. HMRC expects proof that the gifts were affordable and “normal”, meaning regular or part of a clear pattern. Detailed records are essential – without them, the relief may be refused.
Trusts: useful, but not tax-free by default
Trusts allow parents and grandparents to give money away while keeping some control over how it is used.
Cash placed into a trust usually falls outside the estate after seven years. However, gifts into trust above £325,000 can trigger an immediate 20% inheritance tax charge.
Trusts are complex and professional advice is strongly recommended.
Real-life HMRC example
The Government offers a clear illustration of how gifts are taxed to help people better understand how IHT works.
It uses the example of Sally, who is assumed to have died unmarried, and given away large tranches of wealth. This includes:
£50,000 to her brother (nine years before death), which would attract no tax
£325,000 to her sister (four years before death) – no tax, because it is within the nil-rate band
£100,000 to a friend (three years before death) – taxed at 32%, producing a £32,000 inheritance tax bill.
Sally’s remaining estate was worth £400,000, taxed at 40%, resulting in a further £160,000 bill.
Beware ‘gifts with reservation of benefit’
HMRC will ignore a gift if the donor continues to benefit from it.
The most common trap involves property – where someone gives away a home but continues to live in it without paying full market rent.
Even frequently staying overnight or continuing to use items such as jewellery, art or antiques can be enough for HMRC to argue the gift was never genuine.
Giving money to children under 18
Savings held outside a Junior ISA can create a tax problem for parents if interest exceeds £100 a year.
That rule does not apply to money given by grandparents or other relatives.
Parents may also use their personal savings allowance – £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers – to offset interest.
One rule above all: keep records
Executors may be required to explain years of gifting to HMRC.
Dates, values, recipients and the source of the money all matter – particularly for gifts made from surplus income.
Fail to keep proper records and a well-intentioned gift could land your family with a hefty inheritance tax bill.
Get it right, however, and even large estates can be passed on to children without the taxman taking his 40% cut.