Giving it away: gifts, the seven-year rule, and trusts
From simple cash gifts to loan trusts and discounted gift trusts — moving wealth out of your estate while you're alive.
Gifting is the heavyweight of IHT planning: the only strategy that can eliminate a liability entirely, at any scale, using nothing more exotic than generosity and time. It's also the strategy with the most moving parts. Here's the full picture, from simple to sophisticated.
Level 1: The exemptions that work instantly
Some gifts leave your estate the moment you make them — no waiting, no conditions:
- Annual exemption: £3,000 per tax year per giver, with one year's carry-forward. A couple who haven't gifted recently can move £12,000 immediately.
- Small gifts: £250 per recipient per year, unlimited recipients (not combinable with the annual exemption for the same person).
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
- Spouse and charity: unlimited and immediate.
Small numbers individually; done every year for twenty years by both halves of a couple, they quietly move six figures.
Level 2: The unlimited exemption almost nobody uses properly
Normal expenditure out of income is the most powerful exemption in the IHT code, and the least used. Gifts are immediately exempt — with no upper limit — if they meet three tests: they come from income (pensions, dividends, interest — not capital), they form a regular pattern, and they leave you able to maintain your normal standard of living.
A retired couple with £75,000 of pension income and £45,000 of spending can give away £30,000 a year, every year, with every pound outside their estate from day one. Common uses: grandchildren's school fees, funding children's ISAs and pensions, regular premiums on an insurance policy in trust — see the insurance deep dive linked below; this combination is elegant.
The exemption is claimed by your executors after death, so the whole game is evidence: keep an annual schedule of income, expenditure and gifts (HMRC's form IHT403 shows exactly what executors must complete — mirror its format during your lifetime and your family will thank you). A letter recording your intention to gift regularly helps establish the pattern from the first gift.
From April 2027, when unused pensions join the estate for IHT, this exemption gets even more valuable: drawing more pension income than you need and gifting the surplus becomes one of the cleanest responses to the new rules.
Level 3: Outright gifts and the seven-year clock
Larger one-off gifts to individuals are potentially exempt transfers (PETs). Survive seven years and they're gone from your estate entirely — unlimited amounts, no tax, no forms.
Die within seven years and the gift re-enters the reckoning, using your nil rate band before the rest of your estate. Where cumulative gifts exceed £325,000, taper relief reduces the tax on the excess — by 20% once you've survived 3 years, rising to 80% at year 6–7. Note carefully: taper reduces the tax, not the gift's value, so it's irrelevant unless gifts exceed the nil rate band.
Three rules that decide whether outright gifting succeeds:
- Genuinely let go. Gift the house and keep living in it rent-free and it's a gift with reservation of benefit — still fully in your estate however long you live.
- Mind CGT on the way out. Gifts of assets other than cash are disposals at market value — gifting a rental property or share portfolio can trigger a capital gains tax bill now to save IHT later.
- Never gift what you might need. Care costs, longevity and the deprivation-of-assets rules all argue for gifting only genuine surplus.
Level 4: Trusts — gifting with control
Outright gifts have one drawback: the money is theirs now. Eighteen-year-olds, shaky marriages, spendthrift tendencies, or simply wanting to benefit grandchildren not yet born — all are reasons to gift into trust instead, so trustees control who gets what and when.
Gifts into discretionary trusts are chargeable lifetime transfers, not PETs: amounts above your available nil rate band suffer an immediate 20% charge, which in practice caps most trust gifting at £325,000 per person every seven years. Trusts also face small periodic charges every ten years and on exits, and pay top rates on retained income. That tax friction is the price of control and protection — often worth paying, never worth ignoring.
Level 5: Having your cake — loan trusts and discounted gift trusts
The classic objection to gifting is "I can't afford to give it away — I might need it." Two specialist arrangements, usually built around investment bonds, exist precisely for this:
Loan trusts. You don't gift anything — you lend the trust money, interest-free and repayable on demand. The trustees invest it; all growth accrues outside your estate immediately, while your loan can be repaid to you in instalments (commonly 5% a year) to spend. Your original capital stays in your estate until repaid-and-spent, so this doesn't shrink the estate quickly — it freezes the problem while keeping full access.
Discounted gift trusts (DGTs). You gift a lump sum into trust but retain the right to fixed regular payments for life (again typically 5% a year). Because you've kept that income right, the value of your gift for IHT is discounted — a healthy 70-year-old gifting £300,000 might be treated as gifting only £180,000, with that discount outside the estate from day one and the rest following after seven years. The trade-offs: the income level is fixed forever, the capital is genuinely gone, and the discount depends on your health.
Both arrangements are genuinely useful and genuinely complex — bond taxation, trust registration and the interaction with your other allowances all need handling properly.
Choosing your level
Most families should exhaust levels 1–3 — exemptions, surplus income, and well-timed outright gifts — before adding trust complexity. Trusts and packaged arrangements earn their keep where control, protection or retained access genuinely matter, not as default cleverness. And across every level, the same two ingredients decide success: giving only what you truly won't need, and starting early enough for the clocks to run.
This article is for general education only and isn't personal advice. Gifting decisions are irreversible by design — get the sums checked before, not after.
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