The great wealth transfer: Seven golden rules of gifting to help families avoid rifts and IHT blunders

Giving away wealth is one of the most obvious ways to reduce a potential inheritance tax (IHT) bill – but it is also one of the most fraught.

Ian Dyall, Head of Estate Planning at wealth management firm Evelyn Partners, says: ‘The evidence is mounting that older generations are kicking off a gifting boom. We have certainly seen a sharp increase over the past year in the number of clients concerned about their growing IHT liability, with many exploring lifetime gifts to reduce the value of their estate.’

Research has found that more than half of first-time buyers received financial help from family in 2025, amounting to a total of £8.3billion. Including inheritances, that figures rises to £11billion.[1] It has been estimated that a massive £5.5 trillion of wealth in the UK will be transferred over the next two decades, with more than £300 billion expected to be transferred to around 300,000 beneficiaries over the next ten years.[2]

Ian adds: ‘The great wealth transfer from the boomer generation is very much underway, accelerated in this country by the Government’s crackdown on IHT reliefs and exemptions. Thousands more families every year are being drawn into the scope of IHT, a trend that will be amplified by the inclusion of unused pension assets in estates from April next year.’

That step is expected to draw about 31,200 more estates into the scope of IHT by 2030, and about 121,500 estates will face a surge in IHT liabilities.[3] Total IHT liabilities are expected to soar 67 per cent by 2030/31.[4] However, Ian warns:

‘Launching into “DIY estate planning” can be strewn with pitfalls.

‘As families discover they might have an IHT problem, transferring assets is often the first thing they think of. However, gifting to children and grandchildren is obviously freighted with emotion and doubts about relinquishing control of wealth. Older holders of wealth can be paralysed by fears that they will go on to regret gifting significant sums, either because they end up running out of money themselves, or because the gifted wealth gets spent or shared in a way that they strongly disagree with.

‘Plus, when it comes to IHT mitigation at least, not all gifting is considered equal, and there are many “do”s and “don’t”s. Together with the sensitivities particular to each family this can create a real minefield, which is safest to navigate with professional financial planning advice. But these golden rules can be treated as a primer and a warning that good gifting is not a straightforward process.’

1. Start planning early

Ian says: ‘As advisers, one of the things we deal with a lot is clients coming to us quite late in life when a lot of important decisions and steps have already been taken. That can make it more difficult to put effective plans in place for transferring wealth and mitigating IHT.

‘Recent research has found that putting off estate planning could cost affluent UK families up to £12.3bn in preventable IHT once unused pensions enter the tax's scope in April 2027. Affluent families who start planning at 50 could pass on £397,000 more on average than those who wait until age 70.[5]

‘Often the best place to start estate planning is pre-retirement, not least because for most people it will be inextricably bound up with the funding of and plans for retirement. Starting early opens up more options, some of which will close as the decades go by.

‘Obviously, gifts made earlier in life have a higher chance of meeting the seven-year rule for “potentially exempt transfers”. Even the annual gifting allowances, limited though they are now in real terms, could make a dent in an estate if used carefully over two or three decades. The underused “gifts from surplus income” tactic also usually work best deployed gradually over a long time period.

‘Many clients simply feel more comfortable giving away wealth incrementally – as long as they can see the ultimate effect with cash-flow modelling - as it has less of a lifestyle impact and feels more managed than suddenly handing over a big sum.

‘For those with large or complex estates and potentially big IHT bills, early planning is even more crucial. Some trusts involve staged tax charges or benefit from long-term structuring, and leaving it too late limits what can be achieved, while offshore bonds placed in trust are a long-term strategy that we are seeing more interest in. A family investment company is another option that cannot be rushed into.

‘As part of the attraction of these structures is that future investment growth occurs outside the estate, reducing the eventual tax bill, they are obviously best entered into earlier rather than later.

‘Finally, the inclusion of pensions in IHT liabilities from next April brings forth an age to watch out for many families. Because if the pension holder dies at or after age 75 the beneficiaries of their unspent pension funds will pay income tax at their marginal rate on the funds as they are withdrawn. As of right now and for the next eight months or so that still makes pensions an attractive way to bequeath wealth, as there is no IHT to pay.

‘But from April there will be a potential double-whammy of IHT and income tax, which will mean that once the pension holder reaches 75, their unspent pensions become a potentially very costly way to pass on wealth, and this is obviously something that needs planning for.’

2. Deal with doubts and fears: The ‘access versus tax’ conundrum

Ian says: ‘At the time it was introduced, the then Labour Chancellor Roy Jenkins described IHT as “broadly speaking a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue” - referring to the fact it could be avoided by gifting assets at least seven years before dying.

‘Many people are reticent about making lifetime gifts and leave it too late, and to be more generous than Mr Jenkins, it’s not all about distrust. A very real issue is whether they can afford to gift without sacrificing their own financial security, particularly if they might need to pay for care later in life. Cash-flow modelling with a professional adviser can alleviate such fears, by helping clients visualise clearly the future trajectory of their assets under different scenarios and levels of gifting.

‘For those not taking advice the message is, don’t overlook your own needs and financial security. Don’t rush into gifting significant sums before you have done the homework and made sure you can afford them.

‘Other parents and grandparents have worries about the beneficiaries using the money wisely, losing it due to divorce or bankruptcy, or even spoiling the beneficiaries with sudden unearned wealth. Some barriers are entirely psychological. Most of us save throughout our lives for retirement and accumulating savings and property wealth gives us a secure feeling. Turning that on its head and spending or gifting down wealth can feel uncomfortable.

‘The truth is that in most cases these doubts and concerns can be addressed or avoided by careful planning, starting earlier in life and sometimes with the use of certain structures like trusts. Trusts (see 5 below) can be useful as they can allow assets to be gifted – starting the clock ticking on the seven-year rule – while retaining for the gifter some access to or control of the gifted wealth.’

3. Reconsider using pensions to leave wealth

Ian says, ‘So, a challenge with all inheritance tax planning is getting the balance right between maintaining access to the money that you need in order to ensure that you have enough, no matter what the future throws at you, whilst simultaneously reducing the taxable value of your estate. This challenge will become more difficult from April next year when unspent pension funds will become liable to IHT.

‘At present holding money in a pension and spending other assets means you have a pot of money which is available to pay for things like care fees should you need to, but on death those funds are not liable to IHT, making them the more-or-less perfect solution to the “access versus tax conundrum”.

‘But from April next year such unused pension pots will be subject to IHT, and where the holder dies at 75 or older could become the costliest way to leave wealth due to the possibility of double taxation, where the beneficiary also pays income tax on withdrawals. So what other options are available?

‘Generally, if you give money or an object away, you cannot continue to benefit from it. If you do, it is treated as a “reservation of benefit” and it will still be included in the value of your estate when calculating inheritance tax. For example, you can’t give your house to your children but continue to live in it rent free, or even at a beneficial rent. The house in that case would still be liable to tax.

‘However, there are some legal structure and steps you can take to gift while still retaining some access or control.’

4. Punt an inheritance along a generation with a deed of variation

Ian says: ‘The biggest opportunity comes if you inherit money.  If you inherit money from someone else, for example a parent or relative, rather than accepting that inheritance you can use a “deed of variation” to leave that money into a trust which you personally can benefit from.

‘For IHT purposes it is treated as though the person who died made the gift rather than you, so even though you can potentially benefit it is not part of your estate for tax. This can be done up to two years after the person’s death, but once you miss that deadline the very valuable opportunity is gone.’

5. Put your trust in trusts (with advice)

Ian says, ‘Outright gifts are useful as they are unlimited in size. I could give away any amount today and provided I live for seven years that money will no longer be subject to inheritance tax. But most people don’t want to surrender control of or access to very large sums, certainly early in their retirements.

‘Trusts allow you to make a gift today, but keep control over how the money is invested, who you choose to benefit in the future, when you decide to give them money, how much they receive and so on. In short, trusts address many of those concerns that stops a person making gifts.

‘But if you gift more than your inheritance tax nil rate (currently £325,000 per person) into a trust, then you will pay 20% inheritance tax on the excess at the time it goes into the trust.  This generally limits gifts to trust from a married couple to £650,000 every seven years. Which is another reason why starting early is important if you want to use trusts, and why diverting inheritances when you receive them using a deed of variation is important, as they are also unlimited in size.

'Gifting early also gives you the opportunity of seeing the benefits that you gift provides to your family. People are living well into their 80s these days which means their children are often in their 60s before they inherit. As many of us know, the time that money is most valuable to us is as we are establishing ourselves and raise families.’

6. Keep an eye on the residence nil rate band taper

Ian says, ‘Rising property and financial wealth has meant more estates all over the UK have begun exceeding the available nil-rate bands in recent years. But larger estates face a bit of a tax cliff-edge at the £2m mark, as that is when they start to lose the RNRB at a rate of £1 for every £2, until at about £2.7m couple’s combined RNRB is completely eliminated.

‘For estates that creep above £2m into this band, the marginal tax rate rises to about 60% so that if the estate can be kept below £2m by gifting then that will be especially beneficial.

‘An important point to remember here is that potentially exempt transfers are not included in the estate for the purposes of the RNRB taper, so late gifts can be especially powerful in reducing the overall tax bill towards or below £2m.’

7. Have open conversations – and watch the timing of gifts

Ian says, ‘We read stories frequently about high profile disputes over wills and inheritances, but misunderstandings, resentments and family upsets can occur over lifetime gifting too. Lifetime gifts can also give rise to disputes over inheritances post-death, as beneficiaries "do the sums" on how generous parents or grandparents have been to them in total.

‘For instance, it might seem obvious to some parents that treating children equally, with gifts of equal value, is fair. But what if two siblings have drastically different wealth levels or incomes - the less well-off sibling might think it more equitable if they received more financial help.

‘When grandparents give large sums to their grandchildren, what if they also have an adult child who has no children? They might feel the family with children is being favoured unfairly.

‘So it is important, wherever possible, to have open conversations to try and avoid such friction. A good adviser can facilitate this as many families find it helps to have a third “neutral” party involved.

‘Another potential pitfall that could lead to future disappointment is in the timing of gifts. If a gift is below the NRBs, and the donor dies within seven years, then all the beneficiaries of the estate could share the liability on the lifetime gift received by one person, which could cause friction.

‘When making sizeable gifts to multiple children which in total exceed the nil rate band, try to ensure that they receive the gifts on the same day. This is because gifts use exemptions and allowances in the order they are made, so if they are made on different days to different children, the earlier gifts get the benefits of all the allowances and the later gifts suffer the tax.’

NOTES 

[1] Savills UK | First-time buyers receive £11.0 billion in financial support from families 
[2] Intergenerational Wealth Transfers | Kings Court Trust 

[3] 153,000 estates face new or extra IHT liability between 2027-30   

[4] The OBR also estimates IHT receipts will reach £9.1 billion in the current 2025–26 tax year, but by 2030/31 – the ongoing period when NRBs remain frozen – annual revenue is projected to rise to £14.5 billion, a 67% increase over five years. 

[5] Late estate planning could cost affluent UK families £12.3bn in preventable inheritance tax as pensions fall into inheritance tax net  | Octopus Investments