Gifting money to your family – seven tax traps to avoid

Posted: 20th August 2026

With Inheritance Tax (IHT) increasingly affecting families who might never previously have considered themselves wealthy, lifetime gifting is becoming an important part of estate planning.

Giving money or assets to children and grandchildren can be an effective way of reducing the value of an estate. It can also have the advantage of helping family members when they need the money – perhaps to buy their first home, pay school or university fees, or start a business.

However, simply giving an asset away does not necessarily mean it immediately falls outside your estate for IHT purposes. There are also other taxes to consider, which is why substantial gifts are best made as part of a wider inheritance tax planning strategy.

Here are seven common traps to be aware of before making substantial gifts.

#1 – Assuming every gift is covered by the £3,000 annual exemption

Everyone has an annual IHT gift exemption of £3,000.

This is an exemption for the donor, not for each recipient. You cannot, for example, give £3,000 to each of four children every year and assume the entire £12,000 is automatically exempt.

If you did not use your £3,000 annual exemption in the previous tax year, you can carry it forward for one tax year only. However, you must use the current year’s exemption before using the amount brought forward.

This means that someone who made no gifts in the previous tax year could potentially give away £6,000 using the annual exemptions.

There is also a separate small gifts exemption, allowing gifts of up to £250 per person in a tax year. However, this cannot be used for someone who has already received part or all of your £3,000 annual exemption.

#2 – Thinking you can only give away £3,000 a year

This is probably the biggest misconception surrounding lifetime gifts.

There is not a £3,000 limit on how much you can give away.

You could give an adult child £100,000, £500,000 or more. A straightforward gift from one individual to another will normally be a potentially exempt transfer (PET) for IHT purposes.

Provided you survive for seven years after making the gift, it will normally fall outside your estate completely for IHT.

If you die within seven years, however, the gift is brought back into the IHT calculation.

This is why substantial gifting can be a very effective estate-planning strategy but ideally needs to be considered well in advance rather than left until later life.

#3 – Misunderstanding the seven-year rule

Clients often assume that IHT on a gift gradually disappears over seven years.

The position is more complicated.

If you survive for seven years after making a PET, the gift normally becomes fully exempt.

If you die within seven years, the gift is taken into account when calculating the IHT due on your estate.

There is a relief known as taper relief where death occurs more than three years after making a gift. However, taper relief reduces the tax payable on the gift, rather than reducing the value of the gift itself.

This distinction is important because, broadly, if the total gifts made within seven years of death do not exceed the available nil-rate band, there may be no tax on the gift for taper relief to reduce. Rather the gift reduces the amount of lifetime exemption available to reduce the value of the remaining estate.

Making a substantial gift earlier therefore generally provides greater IHT certainty than delaying it.

#4 – Giving away your home but continuing to live there

Giving a property to your children while continuing to live in it is a particularly dangerous area for IHT planning.

For example, a parent might transfer their home, or a share of it, into an adult child’s name believing that the seven-year clock has started.

If the parent continues to occupy the property rent-free, however, HMRC may treat this as a gift with reservation of benefit.

The result can be that the property remains part of the parent’s estate for IHT purposes even if the gift was made more than seven years before death.

There can be circumstances in which a parent genuinely gives away a property and subsequently occupies it while paying a full market rent to the new owner. However, this requires careful consideration, and the rent received by the child can itself have Income Tax consequences.

Simply adding a child’s name to the title deeds is therefore not a straightforward way of avoiding IHT.

#5 – Forgetting that a gift can trigger Capital Gains Tax

IHT is not the only tax to consider when giving assets away.

For Capital Gains Tax (CGT) purposes, a gift to a connected person such as a child will generally be treated as taking place at market value, even though no money changes hands.

Suppose, for example, that you bought an investment property for £200,000 which is now worth £500,000 and you give it to your adult child.

For CGT purposes, you are broadly treated as disposing of the property for £500,000. A taxable gain can therefore arise even though you have received no proceeds from which to pay the tax.

Similar issues can arise when gifting shares, investments and other assets that have increased in value.

Cash gifts do not normally create this problem, but valuable assets should not be transferred without considering the CGT consequences first.

#6 – Overlooking gifts out of surplus income

One of the most valuable IHT exemptions is also one of the least understood.

The normal expenditure out of income exemption can allow regular gifts to be immediately exempt from IHT, without having to survive for seven years.

There is no fixed monetary ceiling.

To qualify, broadly the gifts must:

form part of your normal expenditure;
be made out of income rather than capital; and
leave you with sufficient income to maintain your usual standard of living.

This can be particularly valuable for someone with substantial pension, employment, business, investment or property income who regularly generates more income than they need.

For example, regular contributions towards children’s or grandchildren’s costs, or regular cash gifts, may potentially qualify.

The important point is that the exemption needs to be supported by evidence.

HMRC may examine income, expenditure and the pattern of gifting after death. Families can find it difficult to establish that gifts qualified if proper records were not maintained at the time.

#7 – Failing to keep records of gifts

Lifetime gifting can take place over many years, which makes good record keeping essential.

Executors may eventually have to provide HMRC with details of gifts made during the seven years before death. They may also need information about earlier transactions, particularly where trusts or gifts with reservation are involved.

For gifts out of surplus income, records are especially important.

We recommend keeping a schedule recording:

the date of each gift;
the recipient;
the amount or asset given;
which IHT exemption, if any, is being relied upon; and
for gifts out of income, sufficient details of annual income and expenditure to demonstrate that the conditions were met.

This can save considerable work and uncertainty for executors later.

Should you give assets away now?

Lifetime gifting can be one of the simplest and most effective ways of reducing a future IHT liability, but tax should not be the only consideration.

Once an outright gift has been made, the asset belongs to the recipient. You generally cannot demand it back later.

Before making a substantial gift, you should therefore consider how much capital and income you are likely to need for your own future requirements, as well as the recipient’s circumstances.

It is also important to look at estate planning as a whole. A gift that saves IHT may create a CGT liability, affect the availability of other IHT reliefs or exemptions, or simply leave the donor without sufficient financial resources.

How RJP can help

There is much more flexibility in the IHT rules than the familiar £3,000 annual exemption might suggest. Larger lifetime gifts, regular gifts out of surplus income and carefully planned transfers of assets can all play a role in reducing the eventual IHT burden on a family.

The key is to plan early and understand the tax consequences before transferring the money or asset.

RJP can review your existing estate and gifting plans, calculate the potential IHT and CGT consequences, and advise on the most tax-efficient way of passing wealth to the next generation.

If you are considering making a substantial gift to children or other family members, please contact us before making the transfer.