Gifting for Inheritance Tax: what you need to know in 2025

At Carbon Financial Partners, our mission is to help you write your financial life story by making the right moves now to secure not only your future, but that of the next generation. As we enter a new era of pension and tax regulation, forward-thinking planning is more essential than ever. We have found it especially important to consider the various gifting allowances available to you when thinking about Inheritance Tax given that pensions will form part of your estate from April 2027. Given the complexity of these rules and the fact that the new pension rules do not kick in until April 2027, it is very important to seek advice from tax advisers, solicitors, and financial planners before embarking on a gifting strategy.

What are the current gifting allowances?

Each UK resident can gift up to £3,000 per tax year, inheritance tax-free. This is known as your annual exemption, and if you don’t use it, you can carry one year’s allowance forward – potentially gifting £6,000 tax-free in a single year.

Beyond this, gifts up to £250 per person are also allowed annually, provided other exemptions aren't used for the recipient. Special exemptions apply for wedding gifts: up to £5,000 for a child, £2,500 for a grandchild, or £1,000 for others. And the more complex one is if gifts are regular and from surplus income, they're typically exempt too. The rules on this are vague and it is worth checking with professional advisers to ensure any gifting strategy is in-keeping with the ‘gifts out of surplus income’ rules.

The 7-year rule

Larger gifts beyond these allowances may still avoid inheritance tax if you survive seven years after making them. Otherwise, they could form part of your estate, with taper relief gradually reducing the tax rate if you survive between three and seven years after gifting for larger gifts (smaller gifts will simply eat up your nil rate band.

Pension rule changes from April 2027: why they matter for gifting

From April 2027, pensions will form part of your estate for the purposes of calculating inheritance tax. Individuals have a £325,000 nil rate band (NRB) available to them, potentially extending to £500,000 with the residence nil rate band (RNRB). This means that a couple potentially has up to £1m Inheritance tax free estate allowance. Spending or gifting surplus above this may be an effective strategy to get the most from your money both yourself and for the next generation. The other threshold to consider is at £2m, whereby any estate above this value starts to eat away at the RNRB until it’ completely phased out once the estate reaches £2.7m, so larger estates may revert back to the £325k individual nil rate band (£650k per couple). An effective spending, gifting or a bit of both strategies can help to plan for the potential inheritance tax situation at death and this is something that we have been helping clients with for many years. The new rules around pensions has brought it firmly into focus for more clients.

What this means for you

Retirement planning is changing so assessing when and how to access your pension is increasingly crucial. At Carbon, we believe in mapping your financial journey across the rest of your life so that we can help you spend your assets, including pensions, effectively. Proactive gifting not only reduces potential IHT exposure but can also provide timely support to loved ones at the times they need it most.

Next Steps

If you’re considering gifting as part of your estate plan or need to rethink your retirement strategy based on the new pension changes in April 2027, then Carbon Financial Partners are well placed to help. Get in touch with us to start your financial planning journey by contacting us on 0131 220 0000 or email enquiries@carbonfinancial.co.uk

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This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.