Inheriting a house, or any type of property, can drastically increase the value of your own estate, but it can also make you liable to pay higher taxes. Specifically, if the home you’ve inherited has gone up in value since you inherited it, you may have to pay capital gains tax if and when you decide to sell it. This can produce a fairly hefty tax bill if there’s been a considerable increase in the sale value, however, there are a few ways you can get yourself off the hook for paying capital gains tax on inherited property, as we’ll outline below.

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What is capital gains tax?

Capital gains tax (CGT) is a tax that applies when an investment sells for more than its original purchase price (its base cost). We usually think of capital gains tax in terms of selling stocks from an investment portfolio, however, it also applies to other forms of investments such as property or tangible assets.

With capital gains tax, you are taxed on the profit - or “gains” - you make on the sale, rather than the whole amount you receive. For instance, if you bought a piece of artwork for £6,000 and later sold it for £36,000, the gain would be £30,000. This is the amount that your CGT liability would be calculated on.  

How much capital gains tax will I pay? 

The rate of CGT you pay is related to your income tax band. There are four tax rates bands:

Nil or basic rate taxpayers (individuals earning an income of £50,270 or lower) pay CGT at a rate of 18% on residential property and other chargeable assets where the disposals take place after 30 October 2024. Higher and additional rate taxpayers (individuals earning over £50,270) pay CGT at 24%.

Note: CGT is not payable on gains made when a residential property is your primary residence. 

What is the capital gains tax allowance?

The capital gains tax allowance for 2024/25 is £3,000. This allowance refers to the amount of gains you can realise from assets or property in a tax year before you are liable to pay CGT. If your assets are jointly owned with another individual, you can combine your allowances, effectively doubling the gains you can make to £6,000 before any CGT is owed.

Note: You are not able to carry forward any unused CGT allowance from previous tax years. 

How can I avoid capital gains tax on inherited property?

There are only two ways to avoid paying capital gains tax on an inherited property:

1. Make the inherited property your principal residence
   Through doing this, you avoid paying capital gains tax when you sell it at a later date. This is because the rules state that you are not liable to pay CGT on a home that is your principal residence (your main home), so long as you have lived in it the entire time you’ve owned it (although there are certain allowable absences including the last 9 months of ownership and work-related absences). This allowance only applies on the condition that you do not let any of the home out, either for living or business purposes. However, letting relief might still be available if the letting of the property has been the taxpayer's main or only property.

    

2. Sell or gift the property as soon as you inherit it
   When inheriting property, the base cost of the property for capital gains tax purposes is uplifted to the value on the date of the previous owner’s death. Therefore, immediate disposal (through sale or gift) of the inherited property would not give rise to a capital gain and therefore no CGT would be payable. However, if the inherited property is retained and increases in value after the date of death, there will be capital gains tax to pay on this increase in value.

Note: Renting out inherited property incurs an income tax charge since it is being used as a means of generating an income.

How do you calculate capital gains tax on inherited property?

Calculating capital gains tax on inherited property is no easy task. Fortunately, we’ve broken it down into clear and easy steps below:

• Calculate your total gain

The total gain is the value you sold the property for minus the value when you inherited it, minus all additional costs spent on the property, including legal fees. You also qualify for relief on enhancements such as adding an extension or conservatory. 

However, where a property is in a poor state of repair and being ‘done up’ prior to selling, this would fall under maintenance and would not qualify for relief.

However, enhancing a property, e.g. adding a extension or conservatory would be. 

Total gain = (value of property when sold - value of property when inherited) - additional costs 

• Deduct your capital gains allowance to get your taxable gain

As mentioned above, the capital gains tax allowance for the 2024/2025 tax year is £3,000. This is the total gain you can make from all your assets or property before you have to pay CGT. If you haven’t used any of your CGT allowance on other assets, you can use the full £3,000.

Taxable gain = (total gain - capital gains allowance) 

• Calculate your tax rate and multiply by taxable gain to get your CGT liability

Any capital gain realised is added onto your income for the tax year to calculate how much CGT is due on each portion of the gain. For example, if your income for the tax year is £45,270 and you incur a taxable gain of £10,000, £5,000 of the gain would fall into your basic rate tax band and would be taxable at 18% and the remaining £5,000 would fall into your higher rate tax band and would therefore be taxed at 24%.

Total CGT = (taxable gain x tax rate)

If you’d like to check your calculations,  HMRC has a capital gains calculator which can do all the work for you.

When is the capital gains tax deadline? 

Any capital gains on the sale of assets made in the 2024/25 tax year must be reported by 31^st December 2025 and the CGT must be paid by 31^st January 2026 via self-assessment. 

However, individuals selling residential property have 60 days from the date of the disposal to report the disposal and make a payment on account for the estimated amount of CGT payable to HMRC. This can be done online or by submitting a paper form. Any further balance will be due by 31^st January 2026 via self-assessment. If the payment on account exceeds the self-assessment liability for the 2024/25 tax year, the excess will be refunded. 

Extra tips for how to avoid capital gains tax on inherited property

• Transfer assets to joint names

If you’re married or in a civil partnership, you can transfer assets into joint names. This means you can combine your tax-free allowance making it £6,000 in 2024/25. However, any transfer you make has to be an outright gift.

• Nominate different principal homes if you're unmarried/not in a civil partnership

Unmarried and non-legally bound couples can each make a different property their main home. So, if you inherit a property and want to avoid paying capital gains tax on it, you can make it your main property, while keeping your former property as your partner’s main home. This means you can benefit from tax relief on both. Married couples and civil partners, on the other hand, are legally obligated to nominate one single home as their primary residency.

How can we help?

If you’re concerned about how much tax you may need to pay on any inherited estate or you simply want to discuss ways you might be able to minimise your tax bills, why not get in touch and see if we can help. We can work with you to advise on the best way to minimise the tax payable on your estate, while helping you build your wealth.

With tax and the regulation around it constantly changing, it helps pay to have the experience of a financial adviser to help guide you to stay on top of your taxes, come what may.

If you want to find out more about how we can help you navigate capital gains tax and inheritance tax, please get in touch and arrange a free consultation.

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Please note that the Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

This article is intended as information only and does not constitute financial advice.  

The information contained in this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing.  Levels, bases and reliefs from taxation may be subject to change.

This article has been updated and re-published following the changes announced at the Autumn Budget on 30th October 2024.
 

Pensions, like most forms of income, incur taxes. However, there are ways to ensure you’re not unnecessarily overpaying in tax, even when you’ve retired.

Do you pay tax on your pension?

The short answer to this question is yes, so long as your pension exceeds the minimum threshold for paying income tax.

Income from a pension is taxed exactly like any other form of non-savings income. Firstly, everyone has a personal allowance, which is the amount of money you’re allowed to earn each year before you start paying income tax. Currently, the personal allowance is £12,570 (though this may be reduced if you have earnings above a certain level), so if you receive less than £12,570 per annum of taxable income, then you pay no income tax. Once your taxable income goes above this level you become liable to pay 20% income tax on taxable income between £12,571 and £50,270 per annum. This then increases to 40% income tax for taxable income between £50,271 and £125,140, and 45% beyond that. These income tax rates are valid as of 2025. For updated and current tax rates, see our latest tax tables. 

It’s worth noting however, under certain circumstances, you do not need to pay tax on all of your pension income. Additionally, there are strategies you can adopt to minimise the amount of tax you pay on your pension. 

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How much will I be taxed on my pension?

Another frequently asked question is “how much tax do you pay on your pension?”. As stated above, the amount of income tax you pay on your pension depends how much income you draw from your pension.

The good news, is that some of your pension is, in fact, tax free. If you have a defined contribution pension, whereby your pension is based on how much you and/or your employer have saved into it — which is the most common kind — then you can take out 25% of your pension completely tax-free, subject to a max of £268,275, this is known as the Lump Sum Allowance (LSA).

It is important to understand that, although possible, this does not need to be taken out as one single lump sum. It is possible to take out multiple smaller lump sums each with 25% tax-free, or just take portions of tax-free cash over time rather than all at once (known as phasing), as long as your pension allows for ‘flexi-access drawdown’. The remaining 75% will be taxed according to the standard rules explained above.

If you are only receiving the new state pension, on the other hand, then you do not need to worry about income tax. As of 6th April 2024, the full new state pension is £230.25 per week, or £11,973 per year  — since this amount is within your personal allowance there will be no income tax to pay. Most people who have worked throughout their lifetime will be eligible for a state pension, although the amount you receive will depend on your national insurance record.

However, if you have income from other sources bringing your yearly income higher than £12,570, then you may be expected to pay income tax.

What other forms of tax for my pension should I be aware of?

Income tax is the main tax you can expect to pay on your pension. Previously the lifetime allowance, stood at £1,073,100 and additional tax may have been due if your pension exceeded this limit. However, in the Spring Budget 2023 it was announced that the charge and the lifetime allowance itself would be removed entirely as of the 2024/25 tax year, while a 0% charge would apply to any excess pension above the lifetime allowance in the 2023/24 tax year. There is, naturally, political risk of legislation changing with regard to this tax charge.

The lifetime allowance has now been replaced by the Lump sum Allowance  (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA).

How much can a pensioner earn before paying tax?  

A pensioner can earn up to the personal allowance before having to pay any income tax, which, as mentioned above, is currently £12,570 for the 2025/26 tax year. This personal allowance is the same for everyone regardless of whether you are retired or still working. Your taxable income from a pension, along with any other income you may have, is added together to determine how much tax you will pay. If your total income for the year is less than or equal to the personal allowance, you will not have to pay any income tax on it. 

How do I drawdown on pension without paying tax?  

While you cannot fully drawdown on your entire pension without paying tax, as we've mentioned there is a portion that is completely tax free. You are entitled to take up to 25 per cent of your pension pot as a tax free lump sum, subject to a maximum of £268,275, which is called your tax free cash or pension commencement lump sum. The remaining 75 per cent will then be taxed as an income. Of course, the benefit is you do not have to take all of your tax free cash in one go; you can take it in stages and combine it with taxable withdrawals to manage your income and stay within a lower tax band.  

How do I avoid tax on an inherited pension lump sum?  

Avoiding tax on an inherited pension lump sum depends on the age of the person who has passed away. If the pension holder was under the age of 75 when they died, a beneficiary can inherit the entire pension pot as a tax free lump sum. However, if the pension holder was 75 or older when they died, any inherited lump sum will be taxed at the beneficiary’s marginal rate of income tax.  

These rules are changing, however. From April 2027 pensions will form part of a person's estate for inheritance tax purposes, regardless of your age.  

This is a complex area and there are different rules depending on whether the beneficiary takes the money as a lump sum or as a regular income from a drawdown scheme.  

How do I avoid paying emergency tax on a pension lump sum? 

Emergency tax is often applied to the first withdrawal you make from your pension if you take it as a lump sum and your pension provider does not have an up to date P45 from you. This is because HMRC will assume that this is a regular monthly income, and they will apply an incorrect tax code, which often results in you paying far more tax than you should. To avoid this, it is often better to take a small initial lump sum and then take further withdrawals after you have received a correct tax code from HMRC. Alternatively, you can apply for a tax refund from HMRC once the tax year has ended. 

How to avoid paying tax on your pension

If you want to mitigate tax on your pension, the only certain way to do it is to ensure that your total taxable non-savings income, including your pension income, is below the personal allowance. However, this will likely not permit you your desired standard of living in your retirement years.

Instead, there are a few tips and tricks for limiting the amount of tax you are liable to pay on your pension. These are outlined below:

Only withdraw the amount you need each tax year

Of course, you should take out as much as you need to live a comfortable life, but you might want to keep an eye on staying within certain tax thresholds. For example, if you are careful to take out no more than £50,270 in the current tax year, including any other income sources, you will only need to pay 20% income tax. However, if you were to take out £50,271 or more, you’d pay 40% on the amount over £50,270, up to the next tax threshold. 

Note that at retirement stage, you aren't required to draw down on your pension income to put into savings. This means it can be more financially beneficial to withdraw less, or none, and stay within a low tax range, rather than withdraw more and have to pay substantially more tax.

Take advantage of a drawdown scheme

Drawdown allows you to vary your income from year to year, meaning you can opt to keep it below a certain tax range in a given year. This is not possible for you, however, if you have an annuity, since annuity income cannot be varied at will. Bear in mind that drawdown does come with some risks, so always check with a financial advisor before you pursue it as an option.

Don’t draw your pension in one go

As is evident from the points above, staggering your pension so that you receive less on an annual basis ultimately means you will pay less tax. While you might be tempted to empty your pension pots in one go, it will mean paying income tax on that amount in one year. In most cases, this would be a poor decision from a tax perspective as it may result in your income falling into the higher tax rate bands and triggering a significantly larger tax bill.

Phasing your 25% tax free cash 

In the event that you need to draw more than £50,270 from your pension, you would be liable for 40% income tax on any further income until the next tax band or if you go over £100,000 and hit the 60% tax trap. It is possible, in this instance, to take smaller amounts from your tax-free cash to top up your income when you reach these limits. When planned with care, this can be an excellent retirement income strategy to ensure you do not pay higher rates of income tax.

The importance of Pension Freedoms

With the introduction of Pension Freedoms in 2015, this allows far more flexibility for an individual when they come to draw their pensions.  An individual can now draw their pension from minimum pension age onwards, when and if they like, in any portion that they like. As well as this flexibility allowing an individual to tailor their income needs around their chosen lifestyle, it also allows far more flexibility with regards to tax planning, including income tax, as well as inheritance tax, which are all intertwined when planning in this nature. It is therefore important that your pension schemes have adopted the Pension Freedoms to ensure that you have absolute flexibility both on drawing an income as well as on death. It is important to note that not all pension schemes have adopted modern flexibilities. If you are unsure, get in touch.

So, the only way to truly avoid paying tax on your pension is to ensure your pension withdrawals (including your state pensions) do not exceed £12,570 per year.

Ways to reduce tax on your pension however include:

• Not withdrawing more than you need from your pension each year.
• Utilising a drawdown scheme so that you can vary your yearly pension income.
• Avoid drawing large pensions in one go.
• Phasing tax free cash.

How can we help?

The Private Office offers advice from one of our experienced advisers, on how best to manage your pension, including how to avoid paying unnecessary extra tax. Get in touch to arrange a free consultation.

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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.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available.  

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

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

Buy-to-let (BTL) investments have long been seen as a reliable way to generate income and build wealth, whether as part of a broader investment strategy or as a supplement to pension planning. However, the environment for landlords in 2025 is proving increasingly difficult to navigate, so it's no surprise that we’ve seen a noticeable uptick in enquiries from clients questioning whether it’s time to sell their buy-to-let property or second homes, or, in many cases, having already done so.

This shift in sentiment is backed by recent data. According to Rightmove the proportion of rental properties moving to the sales market is at record levels, with landlord sales now accounting for 1 in 5 homes listed. And this isn’t just a trend; it’s fast becoming the new reality for many investors faced with tightening margins and rising compliance costs.

So, what’s driving this change? And more importantly, should you be reviewing your own buy-to-let strategy?

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What’s changed for landlords in 2025?

It’s not just one thing it’s the cumulative effect of tax, regulation, finance costs, and legislative uncertainty that’s making landlords question the long-term value of their investments.

Interest rates and mortgage affordability

• While interest rates may have peaked earlier in 2025, they remain significantly higher than during the ultra-low rate environment of the 2010s. For many landlords coming off longer term cheap fixed rate deals, monthly mortgage costs have surged.

Tax pressures continue to bite

• Since the removal of full mortgage interest tax relief in 2020, landlords have felt the pinch, especially higher and additional rate taxpayers. With personal tax allowances frozen until at least 2028, and the additional rate threshold cut from £150,000 to £125,140, more landlords are finding themselves pushed into higher tax bands without a corresponding increase in real income.
  In essence, your rental income is now taxed on gross receipts, not net profit, resulting in higher tax bills even as operating costs rise.
  Corporation tax changes have also added a layer of complexity. For landlords operating via limited companies, the main rate of corporation tax is now 25%, and while allowable deductions can still be claimed, dividend tax on extracted profits eats into post-tax returns.

Regulatory burdens and energy efficiency rules

• Although the government scrapped the 2025 EPC C requirement in 2023, the issue has returned to focus. Earlier this year the government opened a consultation on new minimum energy performance standards for rented homes, proposing an ‘equivalent of EPC C’ by 2030.

  For landlords with older properties, the potential retrofit costs could run into the tens of thousands, especially for those with multiple properties in need of substantial upgrades. 

  Another factor for some is the Renters’ Reform Bill which could become law by the end of 2025, bringing major changes for landlords. Key proposals include the abolition of Section 21 ‘no-fault’ evictions, new minimum housing standards, and a national landlord register. If passed, it could make it harder to regain possession of properties and increase compliance requirements. We expect more clarity in the Autumn Budget.

It’s not just landlords. Second homeowners facing further costs

In addition to challenges for landlords, second homeowners are also seeing rising costs. Several local authorities across the UK have introduced or increased council tax premiums on second homes, with some charging up to double the standard rate. There’s also growing pressure on the government to tighten tax rules further in the Autumn Budget, potentially reducing reliefs or increasing CGT on second homes. For those holding property primarily for capital growth, the financial benefit is becoming harder to justify.

What are your options in today’s market?

With all these pressures, you may be wondering whether to continue holding your buy-to-let, restructure your ownership, or exit altogether. Here are a few key options to consider:

1. Hold – but reassess your strategy

If you're on a favourable fixed-rate mortgage and your property still generates strong yields, it might make sense to hold. But don’t assume what worked before still works now, a financial review is critical. Understanding the true after-tax return, accounting for interest costs, and forecasting future maintenance or EPC-related costs is essential.

2. Incorporate – moving your portfolio into a limited company

Incorporating your portfolio may allow you to offset mortgage interest and other expenses more effectively. But the decision isn’t straightforward, higher mortgage rates, stamp duty costs on transfer, and corporation tax can outweigh the benefits. This route can work well in the long-term, but you’ll need careful tax and legal advice before making any changes.

3. Transfer ownership to a lower earning spouse

If your partner is a basic-rate taxpayer, transferring part or full ownership of the property may help reduce the overall tax bill. This must be done properly to avoid triggering tax charges, so working with a solicitor is recommended.

4. Sell and reinvest

If the numbers no longer work or the hassle is no longer worth it, selling may be the right move. Whether you’re unlocking equity to pay off debt, support retirement, or diversify your investments, there are viable alternatives to bricks and mortar.
From diversified investment portfolios to tax-efficient vehicles like ISAs, pensions or bonds, we can help design a solution tailored to your goals, tax situation, and risk appetite. You don’t have to give up on income, just the stress that often comes with being a landlord.

Keep one eye on the market, and the other on the Chancellor

Buy-to-let remains a viable strategy for some but it’s certainly no longer the "easy money" investment it once was. The landscape has changed, and for many landlords, the numbers are becoming harder to justify.

Whether you're an accidental landlord with one property, or a company landlord managing a small portfolio, now is the time to review your strategy, particularly ahead of the Autumn Budget 2025, which could shift the dial once again.

If you’re thinking of selling your buy-to-let property or want to explore other ways to invest more efficiently, we’re here to help. At The Private Office, we work with landlords and investors just like you, people with over £100,000 in investable assets who want clarity, confidence, and control over their finances.

We’re a team of award-winning Financial Planners, and we’d be happy to help you understand your options and make informed decisions for the future.

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The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. 

The value of your investments can go down as well as up, so you could get back less than you invested.

Your buy-to-let property may be repossessed if you do not keep up repayments on your mortgage.

The Financial Conduct Authority does not regulate tax planning and some forms of buy-to-let. 

Inheritance tax (IHT) is a tax levied on an estate before the assets are passed to the beneficiary via inheritance or as a gift. Although IHT is paid on death, it can also apply to some gifts that are made before the person dies. If you’re making a financial gift, you need to understand whether the gift is tax-free, or whether it will create a tax bill, either immediately or further down the line. That’s why it’s critical to understand the 7 year gift rule in inheritance tax. 

Potential budget changes

There continues to be speculation that inheritance tax planning could face further reform in the upcoming Budget in November. While no official proposals have yet been confirmed, rumours include possibly extending the current seven-year rule to ten years. These rumours come at a time when inheritance tax receipts are at record highs, and the government is under increasing pressure to address fiscal imbalances. However, whatever the outcome, it’s always sensible to review your estate plans sooner rather than later.

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Introduction to inheritance tax 

Before we explain the 7 year gift rule in inheritance tax, it’s important to provide a basic overview of what we mean by the term “inheritance tax”. 

Simply put, inheritance tax is a tax on the estate (i.e. money, possessions, property) of a person who has died. It's a one-off tax that must normally be paid within 6 months of the deceased's death (exceptions may apply). IHT is also referred to as a cumulative tax because it takes into account earlier gifts when assessing the amount of tax that is due. 

Currently, the nil-rate band (i.e. tax threshold) for inheritance tax is £325,000 for individuals, or a combined nil-rate band of £650,00 for married couples or civil partnerships in addition to the main residence nil-rate band (RNRB) currently £175,000 (per individual), whereby no tax is paid on amounts at or below this level. However, any balance over this threshold could be subject to a tax charge which at present, is a standard inheritance tax rate charge rate of a hefty 40%, or 36% where 10% of the net estate is left to charity. Other tax rate charges may apply and are discussed later in this article.

You’re also going to be hearing the term “gift” throughout this article. But what is a gift? Forget about ribbons and wrapping paper. HM Revenue and Customs (HMRC) defines a gift as something which has a value (i.e. possessions, money, property), or a loss of value that occurs when something is transferred (i.e. if you sell a house for less than it’s worth to your children, the difference in value is defined as a gift). 

For more information about general inheritance tax-related topics, we have created a handy downloadable guide. 

Understanding the 7 year gift rule in inheritance tax 

So, what is the 7 year rule in inheritance tax? Essentially, there are a range of gifts that are exempt from inheritance tax. Everything else is defined as either a chargeable lifetime transfer (CLT), which is for gifts into a discretionary trust that may be subject to an immediate 20% IHT charge (if paid by the trust, or 25% if paid by the settlor), or a potentially exempt transfer (PET) where the gift will only be completely tax-free if you live for 7 years after gifting it (assuming that the gift has been given to an individual, rather than a business or trust). If you die within 7 years of gifting the asset, then the gift will count towards your nil-rate band, as we mentioned above, meaning that it may still be subject to IHT. After 7 years, the gift doesn’t count towards the overall value of your estate. This is known as the 7 year gift rule in inheritance tax. However, the 14 year rule may mean that a failed CLT brings a previous PET back into the estate for assessment.

What is the gift inheritance tax threshold? 

As we stated earlier in the article, the inheritance tax threshold (also referred to as the nil-rate band) is £325,000 plus the £175,000 RNRB (if available). This is the total amount of your estate that you can pass onto your inheritors without paying IHT. However, if the value of your estate exceeds the gift inheritance tax threshold, you’ll have to pay inheritance tax on anything above the threshold. For example, if your estate is valued at £450,000, you will only need to pay inheritance tax on £125,000 (assuming no RNRB is available). 

Inheritance tax-free gifts 

If you die within 7 years of gifting an asset to an individual, the 7 year gift rule in inheritance tax means that the beneficiary may be required to pay IHT. If you want to protect your wealth for your loved ones, it’s important to remember that some gifts don’t incur any inheritance tax charges if you give them away while you’re still living. 

Inheritance tax-free gifts include: 

• Gifts to your partner or spouse – any gifts you make to your UK-domiciled spouse/civil partner are free from inheritance tax, and some gifts to non-UK domiciled spouse are also exempt.
• Wedding gifts – in a wedding/civil partnership, you can gift (free from inheritance tax) up to £5,000 to a child, £2,500 to a grandchild/great grandchild, or £1,000 to anyone else.
• Gifts from your income – as long as the gift doesn’t affect your normal standard of living, you can make gifts out of your normal income, i.e., Christmas/birthday/anniversary presents, regular payments, life insurance policy premiums, etc.
• Gifts to assist with family maintenance – gifts helping your relatives (i.e., ex-spouse/former civil partner, a child, or a dependent relative) with living expenses are free from inheritance tax.
• Gifts to charities – you can make gifts of any value to charities, universities, museums, and community sports clubs without paying inheritance tax.
• Gifts to political parties – finally, gifts to political parties are exempt from inheritance tax if, at the last general election before your death, the party either had at least two MPs elected to the House of Commons, or had one MP elected and, across all constituencies where it stood candidates, the party received at least 150,000 votes in total.

There’s also an annual exemption for inheritance tax-free gifts worth up to £3,000. In other words, every year you can gift up to £3,000 free from inheritance tax. Furthermore, you can carry over an unused annual exemption from the previous year, provided that the current year's allowance is used first. Remember that gifts valued above the gift inheritance tax threshold of £3,000 are subject to IHT. In addition, there’s the small gifts exemption, which enables you to make an unlimited number of small inheritance tax-free gifts each year, outside of your annual exemption. These gifts are for up to £250 each, provided that you have not already used another exemption for the same person. 

What is taper relief? 

Another key aspect of the 7 year rule in inheritance tax, is taper relief. Essentially, taper relief comes into play if the benefactor doesn’t live for the full 7 years. It means that if the benefactor survived for 3 years or longer, the inheritance tax payable is applied on a sliding scale. As you can see, it’s better to give gifts earlier, rather than later. 

Remember, taper relief only applies to the amount of tax the recipient has to pay on the value of the gift that’s above the nil-rate band. 

For example, suppose Person A gifted £600,000 to their son in May 2016. Person A died in March 2021, having left their £1,200,000 estate to their son as well. Because Person A died within 7 years of making the gift, it contributes towards their nil-rate band. IHT is due on the value of the gift above the nil-rate band (£600,000 - £325,000 = £275,000), but because Person A died 4-5 years after making the gift, the amount of IHT their son is required to pay was reduced by 40%. So, the overall amount of inheritance tax that Person A’s son needed to pay was £66,000 (£275,000 x 24% = £66,000). 

Because the gift used up Person A’s entire nil-rate band, their son will need to pay inheritance tax on the estate at the full 40% IHT rate as well. This means that the estate of Person A had to pay £480,000 (£1,200,000 x 40% = £480,000) before the assets could be distributed. 

There are separate rules around property, which means a higher nil-rate band is available for some, known as the residence nil-rate band. The residence nil-rate band is only applicable to direct decedents, so it’s important you understand the rules depending on who is receiving the gift, how the tax is applied to the gift and how these different rules apply to you.  

Pensions and inheritance tax

Although currently pensions usually fall outside your estate for inheritance tax purposes, it’s important to understand how your pension wealth is passed on. If you die before the age of 75 and your pension is in a defined contribution scheme, your beneficiaries can usually inherit the fund tax-free. If you die after 75, the money passed on will be subject to income tax at their marginal rate, but not IHT.

However, this is all set to change. In one of the most significant recent announcements, the government has confirmed that from April 2027, unspent defined contribution pensions will be included in a person’s estate for inheritance tax purposes. This will bring pensions under IHT for the first time in decades, affecting many estates that previously expected to fall below the threshold. As pensions often represent a substantial portion of an individual’s total wealth, this change could lead to a notable increase in the number of estates facing IHT liabilities. Reviewing how your pension is structured and who is nominated as your beneficiary is essential.

Who pays inheritance tax on gifts?

If you end up incurring IHT on gifts because of the 7 year gift rule in inheritance tax, you’re probably wondering who’ll actually need to make the payment to HMRC. It’s a legitimate question.

If your estate is above the nil-rate band, funds from your estate will be used to pay inheritance tax to HMRC. This will be dealt with by the person who is dealing with the estate (if there’s a will, this person is referred to as the executor). When it comes to gifts, if the benefactor dies before 7 years have elapsed, the recipient of the gift may have to pay IHT.

How can we help? 

The gift inheritance tax threshold along with the broader 7-year gift rule, is a fairly complex topic. With potential changes coming in October, these rules may be amended or significantly altered, leaving many unsure of the best course of action. If you would like to discuss your specific situation and explore inheritance tax planning options, please contact The Private Office for a free initial consultation with one of our financial advisers.

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