Christmas is the time for giving and, if you have a high-value estate, it could be worth thinking about giving with gusto as part of your inheritance tax planning.

You might want to help a child with a house deposit, or a grandchild with university fees. But if your estate is likely to be liable for inheritance tax, then you need to be aware of the rules.

If you live for seven years after making a substantial gift, its value will usually fall outside your estate for inheritance tax purposes. But if you die within seven years of giving away money, and your estate is large enough to be subject to inheritance tax, the gift may be factored in when your estate is being settled.

The inheritance tax thresholds

Everyone has an allowance of £325,000 — known as the nil-rate band — that they can pass on after death, free of tax. There is a further tax-free allowance of £175,000 — the residence nil-rate band — if you leave the family home to direct descendants, such as children or grandchildren. Anything left to a spouse or civil partner is inheritance tax-free and they can also inherit one another’s allowances, giving a couple a total of £1 million to pass on tax-free.

• Visit Times Money for personal finance news, guides and expert columnists

If your estate is worth more than £2 million, the residence nil-rate band starts to be tapered away, until it is lost completely on estates worth £2.35 million or more — £2.7 million for a married couple. If your estate, including money, property and possessions, is worth more than the allowances, then 40 per cent inheritance tax can be charged on the excess.

At the moment only 4.6 per cent of deaths result in a tax bill but this will rise from April 2027, when private pension savings will become liable for inheritance tax.

Wealthy older people who don’t want to land their families with a big tax bill often choose to pass on their money while they’re still alive. Justin King from the Dorset-based advice firm MFP Wealth Management said he encouraged clients to give away money, as long as they can afford it, so that they can see it being enjoyed and appreciated.

• Inheritance gift guide: the do’s and don’ts of giving away money

He said: “The taxman can effectively top up your Christmas gifts. If your estate will pay inheritance tax, giving £1,000 now could save your family £400 later — depriving HMRC of 40 per cent. You get to give generously today, and both you and the recipient can smile. It’s effectively a 66.7 per cent return on your gift.”

Giving away small sums

You can give away modest amounts each year with no inheritance tax consequences, even if you don’t live for seven years after making the gift.

A gift allowance of £3,000 each tax year can be given away without it later counting towards the value of your estate. This can go to one person or be spread among several. If you don’t make full use of it one year, you can carry any unused portion to the next tax year. That means a couple can give away up to £6,000 each tax year — potentially £12,000 if they didn’t use the allowance in the previous tax year.

You can also give unlimited gifts of up to £250, as long as you haven’t used another gift allowance on the same person. And you can give £5,000 to a child as a wedding gift, while grandparents can each give £2,500. This is on top of the standard annual £3,000 allowance.

• Everything you need to know about the seven-year inheritance tax rule

Married couples or civil partners can give money or assets to each other without any inheritance tax consideration. There’s also no tax on any gifts given to charities or political parties.

Another, often overlooked, option is to make regular gifts out of surplus income — ie from your pension income or wages but not from your savings. There’s no limit to how much you can give away tax-free, as long as HMRC can see evidence that the gifts come from income and do not affect your standard of living. You don’t have to give money away each month for it to count as regular income, but there needs to be a regular pattern that you can show evidence of.

The seven-year rule

Gifts made outside the allowances, and within seven years of your death, will be included in your estate and could be liable for tax, although the rate of tax varies. If you die within three years of making the gift it could be liable for the full 40 per cent tax rate. If you live for three years after making the gift, the rate drops to 32 per cent; it is 24 per cent after four years, 16 per cent after five years and 8 per cent after six years.

• Families face £3m inheritance tax bills on ‘failed gifts’

Some families might decide that Christmas is a good time to start the seven-year clock ticking, says Ian Dyall from the investment firm Evelyn Partners.

“When making sizeable gifts to children, try to ensure that they get them on the same day, which could well be Christmas Day or thereabouts,” he said. “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 could suffer the tax.”