Top five tips to consider for lifetime gifting following the Budget changes

The recent Autumn Budget introduced significant changes to inheritance tax (‘IHT’), most notably the proposals to limit agricultural relief (‘AR’) and business relief (‘BR’) from 6 April 2026, and the introduction of IHT on pensions from 6 April 2027.

Whilst there is still no legislation to consider, it is clear that in light of these changes, lifetime gifting will play an even more important role in minimising IHT.

Five top tips to consider for lifetime gifting:

Trading businesses – share the love

Until now, the value of a business interest that qualified for BR was reduced by 100% when calculating IHT, provided certain conditions were met.  However, from April 2026, only the first £1 million will receive the full 100% relief.  Any value above this limit will only qualify for 50% relief.

In practical terms, this means a maximum of £1,650,000 could pass free of IHT:

• The first £1 million is fully exempt; and
• The remaining £650,000 is reduced by 50%, leaving £325,000, which falls within the nil rate band and is also tax-free.

Based on current announcements, it appears that this £1 million allowance is not automatically transferable between spouses.  Therefore, gifting an interest (such as shares) in a qualifying business to a spouse who is not already a shareholder could allow a couple to pass up to £3.3 million of business value free of IHT.

Additionally, gifting business interests to other family members interests can help spread the risk and maximise use of each individual’s £1 million allowances, ensuring greater tax efficiency.

Planning with a farm

As with BR, agricultural assets qualifying for 100% AR will from April 2026 be subject to the same limit of £1 million.  Unfortunately, there will not be separate allowances for business and agricultural assets.

There may be opportunities to gift agricultural assets or a share in the farming partnership to a spouse or child who has shown a strong interest in getting involved in the farm.

The 7-Year rule – use it or lose it

Gifts made at least seven years before death are fully exempt from IHT and always have been.  Despite speculation before the Budget, no changes to this rule were proposed.  If you have assets that you can afford to give away, gifting remains a valuable succession planning tool, provided the recipients are ready to inherit.

Even if you do not survive the full seven years, surviving more than three years may allow taper relief to apply, reducing the IHT due on the gift.

Maximise other IHT allowances and exemptions

Several valuable (but often overlooked) IHT reliefs allow you to make gifts without needing to survive seven years:

• Gifts from excess income

Regular gifts from excess income can pass immediately free of IHT.  Provided you establish a pattern of giving and can prove your income exceeds your expenses in the year of the gift, these amounts are IHT exempt.

• Annual exemption

You can gift up to £3,000 each tax year, without IHT becoming due.  Any unused exemption can be carried forward for one tax year .

• Small gifts

You can gift up to £250 to as many individuals as you like in a tax year, provided no other IHT exemption applies to the same recipient.

• Gifts for weddings and civil partnerships

If someone in your family and friendship circle is getting married, you can gift up to £5,000 to a child; £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else – free of IHT – conditional upon the marriage or civil partnership taking place.

• Charitable gifts

Donations to registered charities are always IHT-free, whether made in lifetime or on death.

Potential for pension planning

From April 2027, unused pension funds (e.g. in a SIPP) are expected to be included in your estate for IHT purposes, as outlined in the Budget announcements.

We await clarity following the government’s technical consultation on the IHT treatment of undrawn pension pots.  While pensions could provide an alternative source for gifting, it may be premature to draw from your pension to gift now until we have more specifics on the changes.

In particular, withdrawing from an IHT-free pension pot to make gifts now could result in additional IHT if you die before April 2027.  The position would be worse if the withdrawal triggers an income tax charge.

Watch this space and consider seeking advice once further details are available.

Conclusion

Gifting during lifetime can significantly reduce your estate’s tax liability while benefiting your loved ones. Speak to a tax advisor to optimise your approach in light of the impending new rules.

Contact our private wealth team for more help and advice by emailing [email protected]