Affluent savers dish out cash gifts to reduce inheritance tax

More than a quarter of affluent savers have taken steps to try and reduce the inheritance tax bill they leave behind, data shows. 

In a survey by Paragon Bank, sixty-one per cent of active savers with balances of at least £50,000 said they believed Britain’s inheritance tax regime was unfair and should be changed.  

Some 28 per cent said they had taken steps to try and reduce their exposure to inheritance tax, and of those, 68 per cent said they had done this by giving away cash.

At the moment, someone can pass on £325,000 tax-free, and they get an additional £175,000 allowance if they are passing their main home on to direct descendants. A couple can share these allowances, allowing for a possible £1million to be passed on tax-free.

However, under plans announced by Chancellor Rachel Reeves in the 2024 Autumn Budget, unspent pension pots will be included in inheritance tax calculations from April 2027 for the first time, dragging more people into the net. 

This has led some people to try and reduce their taxable wealth. 

Taxing issues: Inheritance tax is one of the taxes bringing in more coffers to the UK Treasury 

Cash gifts are one of the simplest ways to reduce an inheritance tax bill, because they become exempt from tax if you live for at least seven years. If you die before the seven years are up, inheritance tax is levied on a sliding scale.

Some cash gifts are exempt from tax regardless of the seven-year rule. These include gifts of up to £3,000 a year plus any unused balance of £3,000 from the previous tax year. 

Thirty-seven per cent of people surveyed said they had increased their spending in everyday life to reduce their exposure to inheritance tax. Twenty-seven per cent said they had set up a trust or other legal structure. 

A smaller proportion of those surveyed, 16 per cent, said they had gifted an asset, such as property or land, according to Paragon.   

The research showed that of those who gifted cash, a third gifted up to £3,000 per tax year, in order to stay within the annual gifting allowance. Twenty-four per cent of people surveyed said they had given single cash gifts in excess of £3,000.

More than a quarter of those giving cash in excess of the annual gifting allowance gave between £3,000 and £10,000, while 19 per cent said they had gifted between £10,000 and £25,000 as a one-off sum. 

A third said they had given between £25,001 and £100,000, with more than one in 10, or 14 per cent, gifting more than £100,000. Of this group, 38 per cent said they were concerned about the seven-year gifting rule, but 3 per cent said they were unaware of the rule.

When asked who they had gifted to, almost half of respondents said they had given cash to their children.

A quarter said they had gifted to grandchildren, 19 per cent to other family members and 15 per cent said they had made cash gifts to charity.

Forty-eight per cent of people surveyed said they had looked into inheritance tax rules as part of their financial planning.

Of the 2,000 people surveyed, more than four in 10 said they are not concerned about running out of money later in life, while 44 per cent said they were not very concerned. 

Andrew Wright, head of savings at Paragon Bank, said: ‘As inheritance tax rules continue to evolve, many people are taking practical steps to safeguard their wealth for future generations, whether that means gifting cash, reviewing their wills or putting structures in place to manage how wealth is passed on.

‘What is particularly striking is that those making lifetime gifts are largely doing so from a position of confidence. Most do not feel concerned about running short later in life, which suggests they are planning carefully and acting with purpose rather than simply reacting to future tax liabilities.’

He added: ‘Even with that willingness to act, IHT remains an area where many people still lack confidence. The rules can be complex, so it is important that savers take the time to understand their options and make decisions that are right for their long-term financial position, their families and the legacy they want to leave.’ 

Inheritance tax receipts rose to a record high over the last financial year as Labour’s targeting of property owners helped fund sweeping spending increases.

Official data last month showed that annual inheritance tax receipts rose to £8.5billion in the year between 2025 and 2026. This compared to total receipts of £8.3billion in the previous year.

Susannah Streeter, chief investment strategist at Wealth Club, said more ‘ordinary families’ would be pulled into paying inheritance tax as the freeze on valuation bands are extended, contributing to fiscal drag.