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27 Aug 2025

Will inheritance tax rules on gifts be tightened?

Talk of a cap on lifetime gifts comes as pensions will also be brought into inheritance tax from 2027

Paul Davies

Planning ahead can make a difference for families

Proposed new rules could mean that large gifts are no longer fully exempt from inheritance tax (IHT), making it harder to reduce the size of your estate by passing money on during your lifetime.

The changes come as frozen thresholds and rising property values are already pulling more people into the IHT net – and upcoming 2027 pension rules will bring retirement savings further into scope.

Here, Which? explains the rules around gifting and outlines how the new pension rules could see more people paying inheritance tax.

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A potential cap on lifetime gifts

Rumours suggest that Treasury officials are considering changing the current gifting regime to make it more difficult for people to reduce a potential inheritance tax bill.

The new rules might alter the current system by limiting the total value of one-off gifts that people can make during their lifetime.

The changes might come at a time when new rules around unused pensions and IHT mean that people are increasingly looking to give more money away from their retirement savings or spend it themselves.

It has also been proposed that the taper relief, which applies if you give away more than your nil-rate band (the main tax-free allowance of £325,000 per person) before you die, could disappear. At present, the rate of tax you pay gradually drops between three and seven years after the gift is given.

This move would introduce a cliff edge to the system, so that someone who made a gift in good faith and died one day short of seven years would leave beneficiaries with a substantial tax bill.

Find out more: ways to avoid inheritance tax

What are the current rules on large one-off gifts?

Giving money away during your life is one of the main ways to reduce inheritance tax. In our January 2025 Which? member survey, we found that 62% of people affected by the new pension rules said they plan to give away more.

Gifts of any value leave your estate for inheritance tax purposes after seven years. And you also have annual allowances that let you give money away and it will leave your estate immediately.

Larger gifts that fall outside the set gifting allowances are termed potentially exempt transfers (PETs). These gifts become taxable if you die within seven years, but often you won’t pay tax because your £325,000 nil-rate band covers gifts made in that time before it applies to the rest of your estate.

If PETs are taxable, HMRC charges tax on a sliding scale based on how long you live after making the gift. It’s 40% if you die within three years, then 32%, 24%, 16% and finally 8% if you die six years after giving the gift.

Find out more: inheritance tax planning and tax-free gifts

Can you make other gifts?

There are also gifts you can make every year without any inheritance tax ever being due.

The main one is your annual exemption of £3,000. You can split this between several people and carry forward any unused allowance to the next tax year, but not beyond that.

You can also make unlimited tax-free gifts of up to £250 per person as long as you haven’t used another allowance for them.

If your child is getting married or starting a civil partnership, you can give them up to £5,000 tax-free as a wedding gift. The limit is £2,500 for a grandchild and £1,000 for anyone else.

A separate rule lets you make tax-free gifts out of surplus income. There’s no set limit to how much you can give from your income, but it can’t affect your standard of living. You also need to make these gifts part of your ‘normal expenditure’ and give them regularly.

Leaving more than 10% of your taxable estate to charity in your will reduces the inheritance tax rate on the rest from 40% to 36%.

Find out more: more families risk paying inheritance tax on savings – here's how to reduce the bill

When do I currently have to pay inheritance tax?

At the moment, relatively few estates face an IHT bill. However, the Office for Budget Responsibility (OBR) estimates that the proportion of deaths triggering inheritance tax (IHT) will rise from 5.1% in 2022-23 to 9.5% (or 67,000 families) by the end of the decade.

Inheritance tax is charged at 40% on anything in your estate above the tax-free thresholds. HM Revenue & Customs (HMRC) defines your estate as your property, savings and other assets, after funeral expenses and debts have been deducted.

The main tax-free amount that everyone can leave is £325,000, which is also known as the nil-rate band.

There’s an extra allowance of up to £175,000 if you leave your main home to your children or grandchildren, which is known as the residence nil-rate band. Combined, these let you leave up to £500,000 tax-free

A surviving spouse or civil partner never pays inheritance tax on anything you leave them when you die, regardless of the amount, as long as you’re both domiciled in the UK (meaning it’s your permanent home). If you’re married or in a civil partnership, any unused allowances pass to your partner.

This means that if you die after your partner – often called the ‘second death’ – your estate can pass on up to £1m tax-free.

Find out more: inheritance tax rates and thresholds

Unused pensions and inheritance tax

Reports of a lifetime cap on the value of gifts would be another blow to pensioners looking to reduce the value of their estate in advance of new rules covering pensions and inheritance tax that are set to begin in 2027.

An increase in gifting was expected to follow the announcement in the 2024 Autumn Budget, as people chose to give money from pensions to loved ones rather than see it subjected to IHT.

From April 2027, money that’s left in a defined contribution (DC) pension, or in pension drawdown, will be included in your estate for inheritance tax. DC pensions are the most common workplace pensions today, and the amount you have depends on how much has been paid in and how investments perform.

Any lump sum death benefits, including death-in-service payouts from defined benefit (DB) pensions (where income is based on salary and years of service) if someone dies while still employed, will not be subject to IHT. If a defined benefit pension pays a regular income to your spouse or civil partner after you die, this is also exempt.

Find out more: what happens to my pensions when I die?

Other ways to reduce your IHT bill

Taking out life cover is one way to insure against a possible inheritance tax bill. You can write a whole-of-life insurance policy into trust so the payout doesn’t form part of your estate for tax purposes.

You pay monthly premiums, and when you die your beneficiaries can use the money to settle the inheritance tax bill quickly without waiting for probate. If you’re married or in a civil partnership, the best option is usually a ‘joint-life, second death’ policy.

This insures both partners but only pays out when the second person dies, which is when inheritance tax becomes due.