New analysis is encouraging families to take advantage of existing inheritance tax (IHT) rules to grow wealth for future generations while reducing potential tax liabilities.
Inheritance tax is a levy applied to the estate of a deceased individual, including property, savings, and investments, typically charged at 40% on the portion of an estate that exceeds the current £325,000 threshold (known as the nil-rate band).
While additional allowances may apply—such as the residence nil-rate band for passing on a main home—more estates are expected to fall within the scope of IHT in the coming years due to frozen thresholds and rising asset values.
As a result, financial experts are increasingly highlighting the importance of early planning. One of the most accessible and effective tools available is lifetime gifting. Under current rules, individuals can give away up to £3,000 each tax year without that amount being added to the value of their estate for inheritance tax purposes. This is known as the annual gifting allowance, and it can be carried forward one year if unused.
Strategic gifting—particularly by grandparents—can play a key role in both estate planning and long-term savings – or even creating a short term emergency fund. By making use of the annual allowance, families can gradually pass on wealth in a controlled and tax-efficient manner, reducing the eventual tax burden on their estate.
One approach gaining attention involves directing these gifts into Junior ISAs (JISAs), which provide a tax-efficient savings vehicle for children. JISAs allow contributions of up to £9,000 per year, with all returns free from income tax and capital gains tax. Over time, consistent contributions can build a substantial financial foundation for younger family members.
Importantly, once a Junior ISA is opened by a parent or guardian, contributions can be made by anyone, including grandparents, relatives, and friends. This creates a collaborative savings model, helping families to pool resources while making full use of available tax allowances.
Beyond the annual exemption, there are additional gifting rules that can further reduce inheritance tax exposure.
Small gifts of up to £250 per person per year are exempt, and certain payments made from surplus income—provided they are regular and do not affect the giver’s standard of living—can also fall outside the scope of IHT.
Larger gifts may still be exempt if the individual survives for seven years after making them, under what are known as “potentially exempt transfers.”
The renewed focus on inheritance tax planning comes at a time of increasing scrutiny around wealth transfer in the UK. With thresholds remaining frozen and proposed changes set to bring pensions into the scope of inheritance tax from 2027, more families are recognising the need to take proactive steps.
Experts suggest that starting early and consistently making use of allowances can significantly improve long-term outcomes. Regular gifting not only reduces the taxable value of an estate but also allows beneficiaries to benefit from investment growth over a longer period.
As inheritance tax continues to affect a growing number of households, proactive financial planning—supported by a clear understanding of the rules—can play a vital role in preserving family wealth and supporting future generations.
Article written by Daniel Tennenbaum
