One way to avoid overpaying inheritance tax

As many as 1 in 50 people who have paid inheritance tax are missing out on a valuable inheritance tax exemption that could reduce their tax bills by tens of thousands of pounds, according to recent data released by HM Revenue & Customs (HMRC).

The ‘gifts out of surplus income’ rule allows individuals to make regular financial gifts without triggering the seven-year inheritance tax rule. Despite this, figures obtained from HMRC through a Freedom of Information request revealed that only 480 estates used this relief in 2021–2022, just 1.7% of the 27,800 estates that paid inheritance tax that year. In comparison, 510 estates claimed the relief in 2020–2021, and 500 did so the year before.

With Labour planning to include pension pots in inheritance tax from April 2027, experts believe this underused exemption may gain more attention. The Office for Budget Responsibility expects that 9.7% of estates will pay inheritance tax by 2029-2030, up from % currently.

A Treasury spokesman said: “We continue to incentivise pensions savings for their intended purpose – of funding retirement instead of them being openly used as a vehicle to transfer wealth – and more than 90% of estates each year will continue to pay no inheritance tax after.”

To find out more about inheritance tax, why not download our free Inheritance Tax guide or read  ‘How much inheritance is tax free’.

What is inheritance tax?

In simple terms, inheritance tax is a tax on a deceased person’s estate and some lifetime gifts, savings, investments, property, and possessions are all included, along with any other assets they may have – once funeral expenses and any debts have been taken out of the equation.

However, this levy only applies to the total value of the estate that exceeds the IHT threshold or ‘nil-rate band’.

As of the 2025/2026 tax year, the threshold is set at £325,000. Anything above £325,000 could be subject to up to 40% inheritance tax and anything below this threshold is tax-free. Homeowners receive an extra £175,000 allowance, and couples can combine their thresholds to pass on up to £1 million tax-free.

The ‘gifts out of surplus income’ rule

While gifts made more than seven years before death are automatically exempt, there is also a £3,000 annual gift allowance for one-off occasions. Additionally, if individuals can show the gifts were made regularly and didn’t impact their standard of living, those payments are also excluded from inheritance tax.

If you’re interested in how to manage your inheritance tax to ensure the best possible wealth protection for you or your family, we can help. Give us a call on 0333 323 9065 or book a free non-committal initial consultation with a member of our team to find out more.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.