How can I make use of my £3,000 Inheritance Tax free gift exemption in the new tax year?

What is the annual exemption?

Each tax year you can give away a total of £3,000 worth of gifts, this is known as your ‘annual exemption’. It can be gifted to one person, or split between several.

The gifts are immediately out of your estate for Inheritance Tax purposes which means it’s a great way to start reducing the Inheritance Tax payable on your estate.

You can carry any unused annual exemption forward to the next tax year – but only for one tax year. So this could mean that if you haven’t used your allowance for the 2021 – 2022 tax year, you could gift £6,000 in the 2022 – 2023 tax year which starts on 6th April 2022.

I want to gift this money to my children and grandchildren, where is the best place to put it?

Cash – You can gift them cash and let them decide what to do with the money. Alternatively, you can look at setting up a long-term savings plan.

Pensions – Every individual who is a UK tax resident can make a pension contribution of £2,880 into a pension each tax year, whether they are earning money from employment or not. The £2,880 contribution will receive 20% tax relief from the Government and a total amount of £3,600 will be invested into the pension. This cannot be accessed until the person reaches 55 years of age (57 from 2028) so it is a good long term savings strategy for their future.

A pension is also held out of a person’s estate for Inheritance Tax purposes so it can be passed on through generations Inheritance Tax free.

ISA – Each individual who is a UK tax resident has an ISA allowance that can be used, the amount you are able to contribute each tax year depends on your age.

An ISA is a tax-free way of saving as the growth and any income is not subject to tax and you can place money into a cash ISA or a Stocks and Shares environment.

Types of ISA available:

Children (under 18) Junior ISA  – can contribute up to £9,000 per tax year.
Adults (18+) ISA – can contribute up to £20,000  per tax year.
Adults (18 – 40) Lifetime ISA* – can contribute up to £4,000 (included in the £20,000 annual subscription).

ISAs are part of an individual’s estate for Inheritance Tax purposes but can be accessed free of tax for the individual to spend. Lifetime ISAs can only be used and accessed to purchase the individuals first home or for retirement at age 60.

*Lifetime ISAs also receive a 25% bonus from the government so for a £3,000 contribution, there would be an additional £750 contributed.

The above information provides you with a brief breakdown of some tax efficient ways of saving money for your children and grandchildren. Making gifts and transfers in your lifetime is one way of planning your estate and it is a good way of reducing the Inheritance Tax that may be due. However, the law in this area is quite complex and it is therefore best to seek regulated financial advice before proceeding with any gifting.

If you would like to discuss estate planning or any other financial planning matter, please do not hesitate to contact us on 0114 2588899 or email Our Financial Planners are qualified to provide advice in the areas of retirement planning, tax planning, savings, inheritance tax, investments and protection.

Please remember that the value of investments may fall as well as rise in value.