Financial gifts are not just for Christmas: Lifetime gifting to step up in 2026

Helping out loved ones and seeing them enjoy greater financial security can bring a lot of joy and satisfaction, and Christmas is a popular time for older savers with spare funds to show such generosity.

Ian Dyall, Head of Estate Planning at wealth management firm Evelyn Partners, says: ‘Lifetime gifting has become more of a priority among clients over recent years as demands have mounted on all household budgets, but especially those of students, young families and the “sandwich generation” who can have caring responsibilities and expenses for both children and elderly parents.

‘Another reason financial gifts could be top of the list for some families this Christmas, is that many older savers are looking to pass on more wealth before they die. The inheritance tax rule changes announced in the 2024 Budget – especially the inclusion of unspent pension assets from April 2027 - mean that more families will be drawn into the scope of inheritance tax in the coming years, and some of those have already taken steps to mitigate this, such as drawing down more heavily on their pensions.

‘In the 2025 Budget, the Chancellor announced a further freeze until 2031 in the IHT nil-rate bands, and the OBR now forecasts 63,100 estates will be hit by IHT in 2030-31, which is almost double the current number, while the total tax take is set to rise by more than 50% to £14.5bn. All of which means more households must start taking steps now to mitigate possible IHT bills, and for most lifetime gifting will be the most straightforward tactic.

‘So financial gifting is not just something to think about as a Christmas one-off. It will be of growing importance in the New Year, as from April 2026 the £1m cap on business and agricultural property relief will kick in. Then as the April 2027 deadline approaches when unspent pensions become liable for IHT, we expect to see more clients pay much closer attention to lifetime gifting.

‘Although there was some brief speculation that the Chancellor could target the gifting regime in her November 2025 Budget, that did not materialise, so the rules remain the same, including the period of seven years for a gift of any size to leave the estate, which is quite favourable.

‘Simple cash gifts can be made at Christmas and as long as they remain within the annual gifting limits (the main one being the annual exemption of £3,000), they will leave the donor’s estate immediately. Larger gifts will be “potentially exempt transfers” and some families might decide Christmas is a good time to start the seven-year clock ticking.

‘But Christmas could also be a good time to kick off a regular gifting regime. Those with excess income might be able to use the “gifts from normal expenditure” rule.  In order to qualify the transfers must be regular – which could be monthly or yearly - and it’s easy to forget, so using a trigger like Christmas helps to ensure that the gifts don’t end up attracting HMRC’s attention.

‘Whether using this strategy or not, careful donors might like to direct their gifts into a tax-protected place which will benefit the child in later years, like a Junior ISA, a bare trust or a pension. But don’t rush into these decisions, do some homework or take advice first, as it could end up backfiring.’

What to watch out for

Dyall says: ‘Before anyone starts giving money away with an eye on a future IHT bill, they should do their homework, or take advice, on what allowances and exemptions they are entitled to, as their potential IHT liability might not be as great as feared.

‘They should also make sure that in an effort to mitigate IHT they are not paying excess tax by gifting, for instance if they face higher income tax on pension withdrawals or capital gains tax on selling investments.

‘Fundamentally, can they definitely afford it, in terms of their future retirement funding? It is important that retirees make sure their own needs and desires are catered for before distributing their wealth. This can be a tricky calculation and professional cash-flow modelling can help to show the future impact on retirement income of gifting.

‘Meanwhile, recipients of big cash gifts should be aware of what a “potentially exempt transfer” means, as a situation could emerge, should the gifter die within seven years, that tax becomes owed on the gift.’

Seven-year rule and potentially exempt transfers explained

Larger one-off gifts can be made above the annual small gift limits, and they should leave the estate as long as the donor then survives for seven years and retains no benefit from or interest in them. During that time such gifts remain potentially exempt transfers.

Dyall says: ‘Generally, the best time to gift if you can afford it is now.  The earlier you gift, the more chance there is of that gift becoming fully exempt.’

If the donor dies within seven years, the nil-rate band is reduced by the value of the gifts, and tax on assets above the NRB will be due at 40%. But if the gifts put together exceed the nil rate band then taper relief can apply, which reduces the tax paid on older gifts. If there were three-to-four years between date of gift and death, the IHT rate lowers to 32%, while at six-to-seven years the rate falls to just 8%. All of which means that large gifts exceeding the nil rate band can moderate IHT liability even if the gifter does not survive for seven years.

Dyall adds: ‘On the other hand, this does mean that a big gift could leave a surprise for beneficiaries who find that they owe tax on it if the gifter does die within seven years. If a gift above the NRBs does become liable for IHT, it is the recipient who will have to pay the bill, and even though they might get taper relief, they may not have the resources to meet the tax bill, possibly having spent the money.

‘If a gift is below the nil-rate bands, and the donor dies within seven years, then all the beneficiaries of the estate could share the liability on the lifetime gift received by one person, which can lead to a different set of difficulties.

‘So ,when making sizeable gifts to multiple children, try to ensure that they receive the gifts on the same day – which could well be Christmas Day or thereabouts. This is because gifts use exemptions and allowances in the order they are made, so if they are made on different days to different children, the earlier gifts get the benefits of all the allowances and the later gifts suffer the tax.’

Gifting excess pensions cash

Dyall says: 'The new IHT rules announced at the 2024 Budget will encourage more individuals to draw down on their pension pots and use the funds in lifetime.

‘Families will especially want to avoid a situation where pension funds are “double taxed”. Under current rules, if the pension holder dies at age 75 or older, the beneficiary could also be charged income tax at their marginal rate as they withdraw funds from the pension pot that has already been subject to IHT.

‘This threatens – after April 2027 - a potential effective tax rate of 67% for the beneficiary of pension assets if they are an additional rate taxpayer, which means that those approaching or beyond age 75 might be looking to give away pension cash. In cases where an estate larger than £2million starts to lose their residence nil-rate band the potential tax penalty is even greater.

'Savers must be careful of the tax they are paying on their pension withdrawals, which could wipe out any eventual IHT saving? This is obviously a danger if the pension withdrawals are subject to the higher 40% or 45% marginal rates of income tax.

‘But there are tax-efficient ways to gift from pension funds. One would be to take the 25% tax-free lump sum, if still available. The gift of such a sum would probably be subject to the seven-year rule before clearing the estate altogether, and we have seen some savers accelerate the withdrawal of their TFLS to set the seven-year clock ticking.

‘Another would be to take regular withdrawals from the pot as income, in order to make gifts using the “normal expenditure from income” rule. Such regular gifts could leave the estate immediately and be free of IHT as long as they meet the rules. Some clients like to pay such gifts into a tax-protected environment like a Junior ISA to build up a savings or investment pot for their loved one.

'An even neater tax-efficient way of using excess pension income would be to start or increase funding of a pension for a loved one, although this would obviously mean the funds will be locked away until the recipient is at least 57 years old. If the recipient does not have an income, you can pay up to £2,880 into their pension in each tax year, topped up to £3,600 by basic-rate government tax relief.’

The use of trusts – and bare trust vs JISA

Dyall says: ‘Many people are reluctant to give up substantial parts of their wealth in case emergency or late-life expenses arise, like care home fees. Others fear that if they gift away their wealth, their relatives might spend the money unwisely, render it inaccessible or have to surrender it in a divorce.’

This issue can be addressed by using trusts – and two types are of particular interest.

Dyall says: ‘A discretionary trust can allay some concerns that a beneficiary might squander assets, or lose them through divorce or a business insolvency – or simply to limit access until a child is mature enough to use it wisely. The beneficiary will be listed as one of several possible beneficiaries and will only benefit at the trustees’ discretion, so the trust can protect the assets, and the timing and size of any payments made from the trust can be controlled.

‘Each person can gift up to the £325,000 nil rate band into discretionary trusts in any seven-year period without triggering an IHT liability. Gifts exceeding this will be immediately liable to IHT at 20% with further tax due if they die within seven years.

‘Alternatively, a bare trust can also be useful, particularly where grandparents wish to invest for grandchildren. When investing for minor beneficiaries, the natural instinct is to use tax-beneficial wrappers such as a Junior ISA, but these are limited in size and can’t be accessed before age 18, even for the child’s benefit.

‘If a grandparent invests for a grandchild using a bare trust, the invested amount is unlimited and money from the trust can be used for the child’s benefit before 18 if required. The investments are taxable, but it is the minor beneficiary who is liable, and their personal income tax and capital gains tax allowances usually eliminate any liability on smaller investments.

‘While bare trusts can be as tax efficient as a JISA but less limiting, anti-avoidance legislation does exist where the money is provided by a parent rather than a grandparent. If the income exceeds £100 the income is taxable against the parent. The JISA has a slight tax advantage for parental investments as they are not caught by these measures.’