In 2025, UK households earning over £100,000—dubbed “Henrys”—are facing a tax storm. With frozen tax thresholds, rising inheritance tax (IHT) bills, and looming changes to pension and childcare support, families are being strongly advised to gift funds to children early to reduce their IHT liabilities.
Key Pressures on High Earners
- 60% income tax zone when earning above £125,140 (personal allowance taper)
- 45% tax band kicks in at £125,140+
- Frozen thresholds for both income tax and IHT until at least 2028
- Potential future levies on pensions and inheritance
Ahead of possible budget changes, early gifting offers a legally endorsed strategy to preserve family wealth.
HMRC Gifting Rules to Know
| Allowance / Rule | 2025–26 Limit | Details |
|---|---|---|
| Annual Exemption | £3,000 per tax year | Gift to any one person, unused allowance carries forward 1 year |
| Small Gift Exemption | £250 per person, any number | Cannot be used alongside other exemptions |
| Wedding Gift Exemption | £5,000 (child); £2,500 (grandchild); £1,000 (others) | Separate from annual allowance |
| Gifts from Surplus Income | No cap*, must be regular | Must maintain standard of living |
| Potentially Exempt Transfers (PETs) | Above exemptions | IHT-free after 7 years (tapered if within 3–7 years) |
*Unlimited if sourced from disposal surplus and regular
The 7-Year Rule Explained
Any PET—a gift exceeding the annual exemptions—will count towards a donor’s estate for IHT unless they survive 7 years after making it. If they die within that window:
- Dying within 3 years: full IHT rate (40%)
- Dying after 3–7 years: taper relief applies, reducing the tax
- Surviving 7 years: gift is completely IHT-free
This makes timing crucial—the earlier gifts are made, the better the tax outcome.
Why Now Is the Time to Act
- Frozen Nil-Rate Band (£325k) and Residence Nil-Rate Band (£175k) remain unchanged. Increased property values mean more estates are getting taxed.
- Childcare support and pension relief reductions squeeze Henry households, adding to financial burden.
- Gifting early starts the 7-year clock, making substantial IHT savings possible.
- Gifts from income (like regular monthly payments) offer tax relief without impacting capital.
Common Gifting Strategies
- Use full £3,000 annual exemption (plus carry forward)
- Pay monthly allowances from income—keeping proper records
- Fund children’s education or weddings using specific gifting exemptions
- Make one-off lump sums as PETs to start the 7-year clock
Example Scenario
Parent aged 65, estate worth £1.2m:
- Gifts £100,000 using annual exemptions in year 1
- Gift qualifies as a PET
- Parent survives 5 years, so taper relief applies:
- Gift above nil band = taxable
- Tax charged at 40%, reduced by 60% taper = 16% effective rate
Total IHT saving compared to gifting five years later.
Practical Steps to Gift Successfully
- Calculate total estate and exemptions (including spouse, residence).
- Make gifts using annual, small, income, and wedding allowances.
- Start the 7-year clock—make PETs early.
- Document everything: amounts, dates, regularity, bank transfers.
- Review regularly—adjust gifts if thresholds change.
- Consider trusts for complex estates or needing control.
- Seek financial advice to optimize strategy and avoid pitfalls.
With rising taxes, frozen allowances, and upcoming budget threats, UK families—especially higher earners—should act now. Gifting early helps reduce the UK inheritance tax burden legally and effectively, allowing wealth to pass smoother and smarter.
The clock is ticking—start the process before the 7-year rule cuts off opportunities.
FAQs
Can I gift more than £3,000 a year?
Yes—as a Potentially Exempt Transfer (PET), which becomes IHT-free if you live 7 years after gifting, with taper relief for deaths within 3–7 years.
What counts as gifts from regular income?
Regular payments, like monthly sums for rent, education, or everyday support—provided they don’t reduce your standard of living and are properly documented.
What if I die within 7 years of gifting?
The gift may be taxed on a sliding scale (taper relief). Gifts within 3 years face full 40% tax; those later face reduced rates until fully exempt at year 7