5 costly gifting mistakes and how to avoid an accidental Inheritance Tax charge
Gifting can be a powerful tool for transferring wealth to your loved ones while reducing your estate’s Inheritance Tax (IHT) liability. The more you give away, reducing the value of your money and assets, the less likely your loved ones are to pay IHT after you pass away.
But the rules for making an IHT-exempt gift can be complex, often resulting in missed tax-efficient opportunities – as well as gifts accidentally getting caught in the IHT net.
According to Today’s Wills & Probate, the number of IHT investigations opened by HMRC rose by 41% between the 2023/24 and 2024/25 tax years. To help reduce the likelihood of your estate being investigated after your death, it’s important to get all your ducks in a row when passing wealth on to the next generation.
Here are five of the most common mistakes gift-givers make and what you need to know to avoid an accidental IHT charge.
1. Believing that your gift automatically reduces the value of your estate for Inheritance Tax purposes
When gifting a large sum, you might think it leaves your estate the moment it leaves your bank account. But this might not be the case.
Each year, you have several allowances for gifting. These enable you to give away cash or assets and have their value excluded from your estate immediately.
- Annual exemption: Up to ÂŁ3,000 a year, which can be used for one or multiple recipients.
- Wedding gift allowance: A gift of ÂŁ5,000, ÂŁ2,500, or ÂŁ1,000 upon marriage or civil partnership, depending on your relationship to the recipient.
- Small gift allowance: An unlimited number of gifts up to ÂŁ250 per person, per year (this allowance cannot be combined with any other or with any larger gift).
- Regular gifts out of income: Gifts made regularly out of your normal income, such as contributing to your child’s rent, subject to strict criteria.
HMRC may consider any gifts to individuals made beyond these allowances as “potentially exempt transfers” (PETs), meaning they remain part of your estate for seven years. If you die within those seven years, the value of the gifts would count towards your estate when calculating IHT.
As such, it’s often worth planning your gifts to make the most of your allowances and remain tax-efficient.
2. Misunderstanding taper relief under the seven-year rule
Should you pass away within seven years of making non-exempt gifts, their value may be taxed at a tapered rate (rather than the standard 40% rate of IHT).
When taper relief applies, the gift is subject to IHT at a rate determined by when it was given.
| Years between gift and death | Taper relief applied | Effective IHT rate on gift |
| 0 to 3 years | 0% | 40% |
| 3 to 4 years | 20% | 32% |
| 4 to 5 years | 40% | 24% |
| 5 to 6 years | 60% | 16% |
| 6 to 7 years | 80% | 8% |
However, taper relief only applies if the total amount gifted (across one or multiple gifts) exceeds the nil-rate band. As of 2025/26, this is ÂŁ325,000 but might be up to ÂŁ650,000 if a transferable nil rate band is available from a previously deceased spouse. The portion of your estate below your nil-rate band is exempt from IHT.
Therefore, your estate and beneficiaries may only benefit from taper relief if you gifted more than ÂŁ325,000 (or ÂŁ650,000 if two nil rate bands are available) in the seven years before you died, and only on the portion exceeding the threshold.
When calculating your estate’s IHT liability, gifts are typically the first thing to count towards your nil-rate band. As such:
- If you gifted ÂŁ300,000 in total in the seven years before you died, taper relief would not apply. The gifts themselves would not be subject to IHT, as they sit below the nil-rate band, but including them in your estate would push more of your remaining money and assets over the tax-free threshold.
- If you gifted ÂŁ400,000 in total in the seven years before you died and only had one nil rate band to use, taper relief would be applied to ÂŁ75,000 (the portion exceeding the nil-rate band). The rest would use up your full nil-rate band, exposing more of your estate to IHT.
So, if you’re planning to gift a large portion of your wealth to loved ones, it could be worth passing it on sooner, rather than later, to reduce the risk of it being included in your estate.
3. Not carrying forward any unused annual exemption from the previous year
The annual exemption renews at the start of the tax year (6 April). Once you have used up your allowance for the current tax year, you may be able to carry forward any unused annual exemption from the previous year.
For example, if you didn’t make any gifts in 2024/25, you could gift up to £6,000 in 2025/26.
If you’re making plans to gift tax-efficiently, failing to leverage the unused allowance from the previous year could mean missing an opportunity to pass on more of your wealth to loved ones.
4. Not using both partners’ full gifting allowances
If you’re in a couple, it’s important to remember that you each have your own set of gifting allowances.
As such, you could gift a combined £6,000 in a single tax year under the annual exemption – or £12,000, if you both carry forward your full allowances from the previous year.
Likewise, you each have separate wedding gift and small gift allowances, and can make regular gifts out of your own incomes.
5. Failing to keep a record of your gifts
When you die, it will fall to the executor of your estate to determine which gifts are exempt from IHT.
Without records of your gifts, this could prove difficult. As a result, gifts that should have been excluded from your estate may be counted in IHT calculations.
This is particularly common when you’re making regular gifts out of your income. Without evidence that the gifts met all the criteria, their value could be included in your estate.
As such, it’s sensible to keep a detailed record of:
- How much was gifted in each transfer
- When the gift was made
- Who the gift was given to
- How the gift was made, such as bank transfer, cash, etc.
It’s often wise to let your executor know how to access these records, so they have everything they need to prove where IHT exemptions apply.
Get in touch
Planning gifts to mitigate your estate’s IHT bill can be complex. At Chancellor Financial Management, we can help you make the most of your allowances and gift tax-efficiently.
Email info@chancellorfinancial.co.uk or call 01204 526 846 to speak to an adviser.
If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.