How lifetime gifting can affect estate administration

Gifting during lifetime can be an effective way for individuals to pass on wealth, support their loved ones, and potentially reduce Inheritance Tax (IHT). However, gifts made without appropriate advice, documentation, or record-keeping can create significant complications when it comes to administering a donor's estate when they die.

During estate administration, Executors and professional Advisers may need to identify gifts made during the deceased’s lifetime, establish when and how they were made, and determine their treatment for Inheritance Tax purposes.

At Kings Court Trust, we regularly see estates where families are unaware of gifts the deceased made, or instances where families do not fully understand how those gifts affect estate administration. Where information is incomplete, or family members are unaware of previous gifts, this can lead to several challenges, including:

• Unexpected Inheritance Tax liabilities on lifetime gifts

• Disagreement between beneficiaries where gifts have been distributed unequally

• Difficulties identifying and verifying gifts made before death

• Delays in estate administration due to missing financial records

For Financial Advisers, Will Writers, and other professionals involved in later-life and estate planning, it is therefore important to consider not only the immediate purpose of a gift, but also how it may affect the future administration of the client’s estate.

What is considered a gift for Inheritance Tax purposes?

For Inheritance Tax purposes, a gift can be anything of financial value transferred to another person. Common examples include money, property, jewellery, shares, and other valuable possessions. A gift can also arise when an asset is sold for less than its market value.

For example, if someone sells their property to their children for £50,000 below its market value, the £50,000 difference is treated as a gift. Depending on when the individual dies and whether any exemptions apply, this amount could be considered when calculating Inheritance Tax.

Not every gift will result in additional tax liability. Several exemptions and allowances can help individuals pass on wealth without increasing the taxable value of their estate.

What are the Inheritance Tax gifting allowances?

Annual gifting exemption

Individuals can give away up to £3,000 each tax year without the amount being included in their estate for IHT purposes. This annual exemption can be used for one recipient or divided between several people. If the full allowance is not used, the remaining amount can be carried forward to the following tax year. However, unused allowances can only be carried forward for one year.

Example:

An individual makes a gift of £6,000 on 6 June 2026. If they did not use their annual exemption during the 2025/2026 tax year, they could combine that unused £3,000 allowance with their £3,000 allowance for 2026/2027. As a result, the full £6.000 gift could be exempt from Inheritance Tax.

Small gift exemption

The small gift exemption allows individuals to give gifts of up to £250 per person during a tax year. There is no limit to the number of people who can receive these gifts, provided another gifting exemption has not been used for the same recipient.

This can be particularly useful for smaller gifts to friends, grandchildren, or other family members.

Wedding and civil partnership gifts

Gifts made in connection with a wedding or civil partnership can also qualify for an Inheritance Tax exemption. The amount depends on the relationship between the giver and the recipient:

• £5,000 for a child

• £2,500 for a grandchild or great-grandchild

• £1,000 for any other person

These exemptions can be combined with the annual gifting allowance, provided the relevant conditions are met.

Gifts to charities and political parties

Gifts to qualifying charities and political parties are generally exempt from Inheritance Tax, subject to the relevant eligibility requirements. Where gifts are made to smaller or less familiar charities, it is advisable to check their charitable status and retain evidence of the donation.

Since April 2024, the charitable exemption has generally been restricted to qualifying charities within the UK, following the removal of eligibility for EU and EEA charities.

Gifts between spouses and civil partners

Transfers between spouses and civil partners are generally exempt from IHT, although restrictions can apply depending on their long-term UK residence status. Where assets are distributed unevenly between spouses, lifetime gifting may form part of a wider estate planning strategy.

For example, transferring assets between spouses could help manage the value of their respective estates and, in some circumstances, preserve access to the Residence Nil Rate Band (RNRB). However, the potential tax benefits depend on individual circumstances, so professional advice is important before transferring substantial assets.

Gifts out of surplus income

One gifting exemption that is sometimes overlooked is the ability to make regular gifts from surplus income. Unlike the annual gifting exemption, there is no fixed monetary limit on qualifying gifts made from normal expenditure from income.

However, certain conditions must be satisfied:

• Gifts must form part of the individual’s normal expenditure
• They must be made from income rather than capital
• The individual must retain enough income to maintain their usual standard of living

At Kings Court Trust, we are increasingly dealing with estates where gifts out of surplus income need to be considered. One of the most common difficulties is the absence of detailed financial records. To support a claim, HMRC will require evidence of the deceased’s income and expenditure over the relevant tax years.

Income records may include:

• Employment income
• Pension payments
• Interest and investment income
• Rental income
• Annuity payments

Expenditure records may include:

• Mortgage or rent payments
• Household bills and insurance
• Care home or nursing fees
• Travel and transport
• Holidays and entertainment
• Other regular living expenses

Without this information, Personal Representatives (PRs) may struggle to demonstrate that gifts were made from surplus income rather than capital.

For professional Advisers, encouraging clients to keep clear records of regular gifts and their financial circumstances can make a significant difference when the estate is eventually administered.

Gifts with Reservation of Benefit (GROB)

A Gift with Reservation of Benefit (GROB) occurs when someone gives away an asset but continues to benefit from it. These arrangements are particularly common with property.

For example, an individual might transfer ownership of their home to their children but continue living there without paying rent. Although legal ownership has changed, the individual continues to benefit from the property. Consequently, the property will still be treated as part of their estate for IHT purposes.

GROBs can also arise with other assets, such as:

• Holiday properties that the original owner continues to use

• Classic cars that the giver still drives

• Valuable jewellery that remains in the giver’s possession and use

Unlike most outright lifetime gifts, a GROB does not automatically become exempt after seven years. Where the reservation continues until death, the asset will generally be included in the estate as its date-of-death value for IHT purposes.

Can a gifted property be excluded from the estate?

In certain circumstances, an individual can gift their property and continue living there without creating a reservation of benefit.

For example, they may pay the new owner the full market rent and contribute appropriately towards household expenses. It is important that the arrangement is genuine, properly documented, and reviewed regularly to ensure the rent remains consistent with market rates. If the reservation of benefit ends, the seven-year period may begin from that point rather than the original transfer date.

For Executors, identifying potential GROBs is essential when calculating the estate’s Inheritance Tax liability.

Potential Exempt Transfers (PETs) and the seven-year rule

Potential Exempt Transfers (PETs) are generally outright gifts made to individuals that are not covered by an immediate IHT exemption.

The seven-year rule determines whether these gifts become fully exempt. If the person making the gift survives for seven years, the gift will normally fall outside their estate for Inheritance Tax purposes. However, if they die within seven years, the gift becomes chargeable and must be considered when calculating the available Nil Rate Band (NRB).

The standard NRB is currently £325,000.

Example:

An individual gives their daughter £200,000 in January 2024 and dies in January 2027.

Because the gift was made within seven years of death, it must be considered when calculating IHT. Assuming no other gifts or exemptions apply, the £200,000 gift would use part of the deceased’s £325,000 NRB, leaving £125,000 available against their remaining estate.

Although no IHT would be payable directly on the gift in this example, it could increase the amount of tax due on the estate. This is why accurate records of lifetime gifts are so important.

Chargeable Lifetime Transfers (CLTs)

Chargeable Lifetime Transfers (CLTs) are gifts that may become immediately chargeable to Inheritance Tax when made. They most commonly arise when assets are transferred into certain types of Trusts, including Discretionary Trusts. Unlike PETs, which are generally exempt if the giver survives seven years, CLTs can create an immediate tax liability where the chargeable amount exceeds the available NRB.

The lifetime IHT rate is 20% where the Trustees pay the tax.

If the individual making the transfer pays the tax themselves, the calculation must account for the additional value transferred by paying that tax. This is known as grossing up.

Example:

An individual transfers £200,000 into a Discretionary Trust when they have no NRB remaining.

If the donor pays the tax:

£200,000 x 100 ÷ 80 = £250,000

The tax is calculated as:

£250,000 ÷ 20% = £50,000

The donor therefore pays £50,000 in IHT in addition to the £200,000 transferred into the Trust.

How do CLTs affect future gifts?

CLTs can also influence the tax treatment of subsequent lifetime gifts. Chargeable transfers made within the preceding seven years are considered when calculating the available NRB for later transfers.

For example:

• An individual makes a CLT of £180,000 in January 2023

• This reduces the available £325,000 NRB to £145,000

• A further CLT of £145,000 is made in December 2024, using the remaining NRB

• If the individual subsequently makes a PET of £200,000 in January 2025 and dies in 2026, the earlier CLTs could result in IHT becoming payable on the PET.

Where multiple gifts or Trust transfers are being considered, the timing and order of transactions can significantly affect the eventual tax liability. Professional Advisers should therefore encourage clients to seek specialist tax and estate planning advice before making substantial transfers.

How does taper relief work on lifetime gifts?

Taper relief can reduce the Inheritance Tax payable on certain gifts made between three and seven years before death. However, it is important to understand that taper relief reduces the tax payable on a gift, not the value of the gift itself.

It only applies where the relevant chargeable gifts exceed the available NRB.

The applicable rates are:

Example:

An individual makes a gift of £500,000 in April 2022 and dies in May 2026.

Assuming their full £325,000 NRB is available:

• Gift value: £500,000
• Less NRB: £325,000
• Taxable amount: £175,000

£175,000 x 24% = £42,000 IHT payable

As the gift was made between four and five years before death, the effective IHT rate is reduced to 24%. Without taper relief, the tax on the chargeable amount would have been £70,000. 

What happens when transferable Nil Rate Band is available?

Where the deceased was widowed or had a predeceased civil partner, their estate may be eligible to claim unused NRB from the first death. Resulting in £650,000 of NRB.

For lifetime gifts, this means £650,000 could be gifted before tax becomes payable and not just the individual's £325,000.

This distinction is important because misunderstanding the relationship between lifetime gifts, taper relief, and transferable allowances can lead to unexpected tax liabilities.

Gifting assets that qualify for Business Property Relief and Agricultural Property Relief

Business Property Relief (BPR) and Agricultural Property Relief (APR) can reduce the Inheritance Tax payable on qualifying business and agricultural assets. However, significant changes took effect on 6 April 2026.

A combined £2.5 million allowances now apply to qualifying assets eligible for 100% BPR and APR. Where the value of qualifying assets exceeds this allowance, relief is generally available at 50% on the excess. Any unused allowance can also be transferred between spouses or civil partners, potentially providing up to £5 million in combined 100% relief.

The rules can also affect qualifying lifetime gifts made on or after 30 October 2024 where the donor dies on or after 6 April 2026 and within seven years of making the gift. 

Business Property Relief (BPR)

BPR can apply to certain business assets, including qualifying interests in businesses and shares in unlisted companies. Depending on the type of asset, relief may be available at either 100% or 50%, subject to the applicable conditions and the £2.5 million allowance.

Certain shares admitted to trading on markets such as AIM generally qualify for 50% relief rather than 100%. Where qualifying business assets are gifted during lifetime, additional conditions may need to be met for relief to remain available if the donor dies within seven years.

For example, the recipient may need to retain qualifying business property until the donor’s death, although replacement property rules can apply.

Agricultural Property Relief (APR)

APR can reduce Inheritance Tax on qualifying agricultural property, including farmland, pasture, and certain agricultural buildings. As with BPR, the relief available depends on the circumstances and whether the property satisfies the relevant conditions.

When agricultural assets are transferred during lifetime, it is important to consider how the recipient’s subsequent ownership or disposal of the property could affect the availability of relief.

For individuals planning to pass agricultural or business assets to the next generation, specialist advice is particularly important following the April 2026 reforms.

Other considerations when making lifetime gifts

The presumption of advancement

The presumption of advancement is a legal principle that can arise when property or money is transferred between certain family members. Historically, it has applied to some transfers from father to children and husbands to wives, creating a rebuttable presumption that the transfer was intended as a gift rather than a loan.

However, its application is limited and depends on the circumstances. Where the presumption does not apply, other legal principles and evidence may determine whether a transfer was intended as a gift or a loan.

For estate administration purposes, uncertainty about the nature of a transfer can lead to disagreements between Executors and beneficiaries. Keeping written evidence of whether money or property was gifted or loaned can help avoid disputes later.

Hotchpot clauses in Wills

A hotchpot clause can be included in a Will to account for lifetime gifts when distributing an estate. The intention is often to ensure that beneficiaries receive an equal overall share of wealth, taking into consideration amounts already received during the deceased’s lifetime.

Example:

An estate worth £240,000 is to be divided equally between three children. However, one child previously received a lifetime gift of £60,000.

If the Will contains an appropriate hotchpot provision:

• The £60,000 gift is notionally added to the £240,000 estate
• The total amount considered for distribution becomes £300,000
• Each child’s overall entitlement is calculated as £100,000
• Two children receive £100,000 each from the estate
• The child who previously received £60,000 receives £40,000 from the estate

This achieves an equal overall distribution, with each child receiving £100,000 when lifetime gifts are considered. The wording of the Will is crucial, and hotchpot arrangements should be discussed with a qualified Will Writer.

How professionals can help clients avoid gifting complications

Professional Advisers play an important role in helping clients understand the long-term implications of lifetime gifting. Alongside tax efficiency, it is important to consider how gifting decisions could affect beneficiaries, Executors, and the estate administration process.

Under the FCA’s Consumer Duty, firms must consider foreseeable harm and support good outcomes for retail customers within the scope of their regulated activities. The following practical steps can help Advisers support clients with lifetime gifting.

Encourage clients to keep detailed gifting records

One of the most valuable things clients can do is maintain a comprehensive record of gifts made during their lifetime.  Ideally, this should include:

• The date each gift was made
• The name of the recipient
• The value of the gift
• The type of asset transferred
• Any relevant exemptions or supporting documents

At Kings Court Trust, we often encounter difficulties when families cannot confirm what gifts were made or when they occurred. HMRC may request supporting financial information, including historical bank statements, when reviewing an estate’s IHT position.

Keeping accurate records can help Executors provide the necessary information and reduce avoidable delays.

Help clients understand the seven-year rule

Although many people are familiar with the seven-year gifting rule, fewer understand the circumstances in which Inheritance Tax may still become payable. It is particularly important for clients to recognise that receiving a gift does not necessarily mean there will never be a tax liability.

In some circumstances, recipients may become responsible for paying Inheritance Tax on gifts they received. Encouraging clients to discuss substantial gifts with their beneficiaries can help prevent unexpected financial pressures following a death.

Consider gifting as part of wider estate planning

Lifetime gifting should not be considered in isolation. It can affect the value of an individual’s estate, the availability of tax allowances and the amount ultimately inherited by beneficiaries.

Professional Advisers can help clients consider gifting alongside other estate planning arrangements, including Wills, Trusts, and long-term financial needs. Working with specialist legal and tax professionals where appropriate can help ensure that decisions are suitable for the client’s circumstances.

Stay involved during estate administration

The role of a professional Adviser does not necessarily end when a client dies. Advisers can provide valuable information about the deceased’s assets, investments, and financial arrangements, helping Executors and estate administration professionals establish the full extent of the estate.

They may also be able to advise on the most appropriate assets to realise when funds are needed to settle liabilities, including Inheritance Tax. Remaining involved throughout estate administration can help maintain relationships with surviving family members and beneficiaries.

At Kings Court Trust, we recognise the importance of these ongoing relationships. We work closely with our professional partners and can introduce beneficiaries to their Advisers where appropriate, supporting continuity of financial advice or estate planning following a bereavement.

How Kings Court Trust can help

Lifetime gifting can be an important part of effective estate planning, but its implications do not end when a gift is made. When someone dies, their Executors may need to identify previous gifts, establish which exemptions apply and determine whether any additional Inheritance Tax is payable.

Without clear documentation or an understanding of the relevant rules, this can become a complicated and time-consuming process.

At Kings Court Trust, we specialise in probate and estate administration, helping families navigate the practical and legal responsibilities that arise after death. We also work alongside professional partners, including Financial Advisers and Will Writers, to provide specialist support when their clients need it most. 

If you have any questions or need any support with estate administration, please get in touch with us by emailing ClientServicesTeam@kctrust.co.uk or calling 0300 303 9000.