Gifts and Inheritance: What You Should Know

Updated May 2025

Managing your estate and planning your legacy involves careful consideration of how lifetime gifts may affect your beneficiaries. Gifts made during your lifetime can raise questions about fairness, tax implications, and the legal provisions in your Will. Here, Burt Brill & Cardens’ Managing Director, David Edwards, with over 30 years of experience in private client law, explains key issues surrounding gifts and inheritance.

If you require immediate advice on your inheritance, contact our expert team on 01273 604123.

Could Giving a Child a Gift Affect Their Inheritance?

You may need to update your Will if you have given a child — whether under or over 18 — a significant financial gift, such as assistance with purchasing a property. Without proper provisions, such gifts can create complexities when dividing the estate among beneficiaries.

Key Considerations:

• Equality vs. equity: Imagine an estate being divided equally between siblings, but one has already received a significant lifetime gift. Should the estate account for this prior gift to ensure an equitable distribution?
• Legal concepts: Issues such as ademption (replacement of a gifted asset), the law of portions, and the timing of the Will versus the gift may come into play. These legal doctrines are supported by case law, some dating back to the Victorian era.
• Explicit provisions in the Will: If a lifetime gift is intended to offset part of the inheritance, your Will must explicitly state this to avoid disputes.

Let’s take a simple example. A parent dies, leaving their estate equally between two children, one of whom has had a significant cash advance during the parent’s lifetime. The key question is whether the estate should be divided equally between the two children or whether the gift should be taken into account so that the children have received the same over time.

If you have made a substantial gift to a child and you have also benefited that child in your Will, to avoid disputes, claims and expensive Chancery Court actions your Will needs to make it clear whether the lifetime gift should be taken into account when calculating how much should be paid to that child on your death.

It’s important to note these rules are not limited to children. Similar principles may apply to gifts made to other beneficiaries, including nieces, nephews, or close family friends if the nature of the gift resembles a provision made by a parent.

What Is the 7-Year Rule in Inheritance Tax?

If substantial gifts are made in the lifetime of an individual who then dies, the value of those gifts may have to be taken into account when calculating the total value of the estate liable to inheritance tax. 

Key Points on the 7-Year Rule:

• Tax-Free threshold: Gifts made more than seven years before your death are generally exempt from Inheritance Tax (IHT).
• Within seven years: Gifts made within seven years are offset first against any tax-free nil-rate band (currently £325,000), reducing the amount available to your estate if you should die. If this allowance is already exhausted, part of the IHT liability on death could be attributed to the gift.
• Tax liability: The question arises — should the recipient of the gift pay the IHT, or should it be deducted from the estate? Explicit instructions in your Will can clarify this.

There are specific rules and presumptions surrounding inheritance tax, but the best approach is to include clear provisions in your Will to ensure your wishes are followed. It’s also crucial to address who will be responsible for paying any tax on lifetime gifts. This decision can influence how the estate is divided among beneficiaries, especially when considering the earlier-mentioned rules on portions.

Will My Children Pay Inheritance Tax on My Property?

Inheritance tax on property involves specific rules that can influence the tax liability.

Key Considerations for Property:

1. Instalment options: IHT on property need not be paid immediately. Payments can be spread over 10 years, with interest charged on outstanding amounts. This option is useful if the property is rented or the sale is delayed.
2. Residence nil-rate band: An additional IHT allowance of £175,000 may apply if the property is left to a direct descendant. This allowance can significantly reduce IHT liability, especially when combined with transferable allowances between spouses or civil partners. There are lots of complications if there are remarriages, second marriages or the family home has been sold before death.

Common Pitfalls:

• Downsizing or selling the property: If the property is sold or downsized before death, the residence nil-rate band may still apply, provided certain conditions are met.
• Age provisions in Wills: If children inherit at a specified age (e.g., 21 or 25), the Will must be carefully drafted to comply with rules regarding gifts into trust. Incorrect wording may jeopardise the eligibility for the residence nil-rate band.

In some cases, the residence nil-rate band of both parents may be utilised, allowing up to £350,000 to pass tax-free, provided the parents were married at the time of the first death and the home was left to the surviving spouse.

Exemptions for Gifts Under UK Law

Gifts can be a useful way to manage your estate and reduce inheritance tax liability, but understanding the available exemptions is essential to ensure compliance with the law. Here’s an expanded explanation of the key exemptions for gifts:

Annual Exemption

• Each individual can gift up to £3,000 per tax year without it being included in the value of their estate for inheritance tax purposes.
• If the full £3,000 exemption is not used in one tax year, it can be carried forward to the next year, allowing a total exemption of £6,000. However, it cannot be carried forward for more than one tax year.
• This exemption can be applied to one or multiple recipients, but the total value of exempt gifts must not exceed £3,000.

Small Gifts Exemption

You can give gifts of up to £250 per person per tax year to as many individuals as you like.

This exemption cannot be combined with other exemptions. For instance, you cannot use both the small gift exemption and the annual exemption to give a single recipient more than £250 tax-free.

Wedding or Civil Partnership Gifts

Gifts made in connection with a wedding or civil partnership ceremony are exempt up to specific limits:

• £5,000 for a gift to a child.
• £2,500 for a gift to a grandchild or great-grandchild.
• £1,000 for a gift to someone else, such as a niece, nephew, or friend.

The gift must be given on or shortly before the wedding or civil partnership ceremony and the marriage must take place for the exemption to apply..

Regular Gifts from Surplus Income

Gifts made from your surplus income rather than your capital are exempt from inheritance tax if they meet the following criteria:

• The gifts are part of a regular pattern, such as annual birthday gifts or monthly payments to a relative.
• The gifts do not reduce your standard of living, meaning you have enough income remaining to cover your usual living expenses.
• The gifts are properly documented, with records kept to show the pattern and source of the gifts.

This exemption is particularly useful for individuals with high levels of regular income who want to reduce the size of their estate without triggering inheritance tax liabilities. It is important to keep proper records.

Gifts to Charities, Universities, and Political Parties

• Gifts to registered charities are completely exempt from inheritance tax, whether made during your lifetime or through your Will.
• Gifts to universities and certain other qualifying institutions, such as museums or heritage organisations, are also exempt.
• Donations to political parties are exempt, provided the party has at least two members elected to the House of Commons or one member elected and at least 150,000 votes in a general election.

Leaving at least 10% of your net estate to charity can further reduce the inheritance tax rate on the remainder of your estate from 40% to 36%.

Exemptions Between Spouses or Civil Partners

• Gifts between spouses or civil partners are exempt from inheritance tax, provided both individuals are permanently UK-domiciled.
• The exemption is capped at £325,000 if one partner is not UK-domiciled. However, the non-domiciled partner can choose to be treated as UK-domiciled for inheritance tax purposes, which could make all gifts fully exempt.
• There are significant changes from April 2025 for non UK-domiciled persons and you should make sure you take advice.

Related: Charitable Giving Through Wills and Trusts: Leaving a Legacy

Tips for Managing Gift Exemptions

1. Plan regularly: Utilise annual and small gift exemptions consistently to reduce the value of your estate over time.
2. Keep records: Maintain detailed records of gifts, including dates, amounts, and the exemptions applied. This documentation will assist executors in managing inheritance tax obligations.
3. Review your estate plan: If substantial gifts are made, ensure your Will is updated to reflect these and clarify how they should be treated in the division of your estate.
4. Seek professional advice: The rules surrounding gift exemptions can be complex, and professional advice ensures you maximise the available allowances while complying with UK inheritance laws.

Deprivation of Assets: What You Need to Know

Deprivation of assets occurs when someone deliberately reduces their wealth — for example, by gifting money or property — to avoid paying for care fees or to qualify for state benefits. Local authorities can investigate such actions when assessing eligibility for financial support, such as care home funding.

If a gift is deemed to be a deliberate attempt to deprive yourself of assets, the value of the gift may still be treated as part of your estate. This means you could be assessed as if you still own the asset, potentially affecting your entitlement to financial assistance.

Common examples include:

• Transferring property to children or relatives.
• Giving away large sums of money shortly before requiring care.
• Placing significant assets into a trust without clear justification.

It’s important to note that not all gifts will be considered deprivation of assets. Gifts made for genuine reasons, such as supporting a family member’s education or wedding, are less likely to be scrutinised.

To avoid issues, it’s wise to plan ahead, maintain transparency, and seek professional advice before making substantial gifts or transferring assets. We can guide you through the complexities of care funding and estate planning.

Trusts as an Alternative to Gifting

Setting up a trust can be an effective alternative to outright gifting. It offers greater control over how and when assets are distributed. Trusts allow you to protect assets for the benefit of your loved ones while potentially mitigating inheritance tax liabilities.

A trust can:

• Ensure assets are used for specific purposes, such as education or property purchases.
• Protect assets from being spent irresponsibly or claimed in a divorce or bankruptcy.
• Provide tax benefits, depending on the type of trust and the value of the assets.

Popular trust options include:

• Discretionary Trusts: Giving trustees flexibility to decide how funds are distributed among beneficiaries.
• Bare Trusts: Where the beneficiary has an absolute right to the trust’s assets once they reach 18.
• Life Interest Trusts: Providing income or benefits to one person during their lifetime, with the remaining assets passing to others upon their death.

Trusts can be complex and are subject to specific tax rules. Setting one up requires careful drafting to ensure it aligns with your wishes and complies with the law. 

There can be tax advantages to setting up trusts in Wills but make sure you take good advice.

Related: How to Reduce Your Inheritance Tax Liability by Putting Life Insurance Policies in Trust

Take Action Today

If you do not have a Will or your current Will needs updating, call us at your earliest convenience on 01273 604123 or email us to book your initial appointment. We offer meetings by video call or telephone if you would prefer a no-contact consultation.

Our Brighton solicitors can guide you through the process and help draft agreements that protect your interests. Contact our team today on 01273 604 123 or via email at enquire@bbc-law.co.uk. You can also make an enquiry here.