How and when to invest in your loved ones future

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7 minute read

Inheritance tax (IHT) – tax on the property, money and possessions of someone who has passed away – can potentially lead to loved ones inheriting hundreds of thousands of pounds less than the value of the person’s estate. 

With the coronavirus pandemic putting pressure on the public purse strings, there are concerns that the government could look towards inheritance tax as a way to offset the cost of the coronavirus1.

So now more than ever, understanding current inheritance tax laws and the guidelines around gifting inheritance is essential. Let’s look at what the current laws are, how likely they’re to change and the benefits of gifting money to loved ones. 

This article is for information only and is not financial advice. All references to taxation are based on our understanding of current taxation law and HMRC practice, which may change.  If you're in any doubt or would like help with your finances, we recommend you speak to a financial adviser.


How much is inheritance tax?

Inheritance tax is applied to the estate of someone who has passed away. This includes the value of cash in the bank, investments, property, businesses, vehicles and payouts from life insurance not held in trust – minus any debts. 

What is a trust? A trust is a legal arrangement where you give cash, property or investments to someone else so they can look after them for the benefit of a third person. For example, you might put some of your savings aside in a trust for your children2.

There are two scenarios where your beneficiaries are not required to pay inheritance tax: 

  •  When the value of the estate is below the £325,000 threshold. 
  •  When you leave everything above £325,000 to your spouse, registered civil partner, a charity or a community amateur sports club3.   

In the current tax year 2021/22, no inheritance tax is due on the first £325,000 of the estate. Everything above this threshold will usually be taxed at 40% (or 36% if you leave at least 10% of the net value of your estate to a charity in your will)3. There are some other reliefs available such as agricultural property relief and/or business property relief, which could reduce the inheritance tax liability in certain circumstances.

However, you can access another tax-free amount if you leave your home to your children or grandchildren. In this case, you can take advantage of something called the ‘residence nil rate band’, which is a £175,000 tax-free threshold on top of the existing £325,000. This means that inheritance tax might not be due on the first £500,000 of your estate4



You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate3. Gifts can include money, personal possessions such as jewellery or furniture, a house, land or buildings. If you have any unused ‘annual exemption’ at the end of the tax year, this can be carried forward – but only for one year.

If you make gifts to your loved ones of more than your £325,000 inheritance tax threshold, there will usually be an inheritance tax charge on the excess if you die within seven years. If there is inheritance tax to pay, it's charged at 40% on gifts given in the three years before you die. It can be useful to familiarise yourself with the various thresholds and allowances in order to understand the rules and be prepared, visit Gov.UK ‘How Inheritance Tax works’ for more information.  

Bear in mind: the government has a sliding scale on any inheritance tax due on gifts made three to seven years before your death. This sliding scale is known as ‘taper relief’ which outlines the rate of tax on the gift given3. After seven years, gifts are not counted towards the value of your estate. 


Is inheritance tax likely to change?

The Institute for Fiscal Studies (IFS) has predicted that the government will need to raise an extra £40bn per year by the middle of the decade5. One area that it's looking at to offset the costs incurred by the coronavirus is inheritance tax. 

In the 2021 Spring Budget, Chancellor, Rishi Sunak, announced a freeze on the current threshold levels for inheritance tax until at least 6 April 20266. However, the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness has highlighted two areas that could see changes in the future7:

1.Intergenerational pension asset transfer 

Under current legislation, any unused pension remaining at the time of your death generally stays outside of your estate, and therefore is not subject to inheritance tax. 

A potential change could see unused pension amounts counted towards the estate, unless they pass to your spouse at your time of death. 

2.The ‘seven-year’ rule 

You can currently make gifts during your lifetime and they won’t be subject to inheritance tax, as long as you survive for seven years after making them. 

One of the potential changes to legislation is that this rule could be removed and replaced by an annual allowance of £30,000. Any gifts made above this allowance would be liable for inheritance tax at 10%7


The possible benefits of gifting inheritance

If gifting your inheritance early is something you're thinking about, there could be advantages for both you and your beneficiaries. Let’s take a look: 

1. Think about reducing your inheritance tax liability  

Thinking about gifting some of your inheritance early could potentially reduce the size of your estate and your tax exposure. However, you’ll only feel the full benefit of this if you survive seven years following the gift. 

2. Consider making full use of tax exemptions  

Under the current rules there is a £3,000 annual exemption for gifts, and there are further exemptions for small gifts of up to £250 and wedding gifts. Making use of these allowances might help to minimise your tax exposure.  

3. Explore making a difference in a loved one’s life  

Gifting inheritance early could potentially make a big impact on your loved one’s life. Its appeal is being able to give help when it’s most needed.

An example of this might be when your children are struggling to get on the property ladder or need to lift the burden of debt. If you wait until you have died, your beneficiaries may be relatively old themselves and have less need for the money. However, it will depend on your personal circumstances as to whether this is something you want to explore. 


The cons of gifting inheritance

There are two sides to every coin. So here are some things to be aware of if you're considering giving money to loved ones before you die:  

1. You may need money later on  

Financial planning can be tough because life is unpredictable. Giving your money away early may mean you don’t have what you need in later life. You could live longer or face care costs. And it's very hard to reclaim a gift once it has been made.  

2. It’s hard to share equally  

You could find it hard to divide gifts equally, which could lead to family friction. One child could have more need at the point you're making the decision. Or you could change your mind about how you want to share your wealth.  

3. Tax laws can change  

Tax laws are subject to change. It could be inheritance tax laws, or capital gains tax, but changes in the future could mean that any predicted tax savings are less than what you expected.   

Knowing how and when to invest in the future of your loved ones is a personal decision that depends on individual circumstances. Keeping up to date with changing inheriting tax laws ensures you make educated decisions on how and when you choose to do so. Remember that financial advisers can help, if you don't already have one, you can visit MoneyHelper.



1. Sunak ‘minded’ to hike inheritance tax to help pay UK’s Covid bill. Data source, iNews, May 2021.

2. Using a trust to cut your Inheritance Tax. Data source, MoneyHelper, November 2021.

3. How Inheritance Tax works: thresholds, rules and allowances. Data source, Gov UK, April 2021 – April 2022.

4. Work out and apply the residence nil rate band for Inheritance Tax. Data source, Gov UK, April 2021 – 2022.

5. Current, necessary, fiscal largesse will need to be followed by tough decisions as we deal with a smaller economy, rising demands on government and elevated debt. Data source, IFS, October 2020.

6. Budget 2021, Data source, Gov UK, Page 57, March 2021.

7. Reform of inheritance tax, Data source, APPG, Page 8, January 2020.