We wish to take our household on vacation, is that this IHT avoidance?

My husband and I are both in our mid 70s, in good health and without any financially worries. We are not into extravagant holidays and expensive cars, but we do have a good lifestyle.

We eat well and probably spend way more on healthy quality food than the average couple but also run a moderate car.

We have three children and five grandchildren. All three of our children were given £50,000 each to help them purchase houses more than seven years ago. 

We are hesitant to gift any more as both our mothers lived to be 100.

However, I thought if we enjoyed family holidays each year and we paid the cost, this would be a way of our savings going to the family, but would this be seen as inheritance tax avoidance?

If so, is there a way to use our savings for our family’s benefit, without it being a problem further down the line? B.T via email

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Harvey Dorset, of This is Money, replies: Holidays are a great way to see the benefit that your family can get from your money, and it feels more personal than just giving them a lump cash sum.

Unfortunately, paying for family holidays would likely be considered gifting, meaning that the seven-year rule would apply.

However, with a £6,000 gifting allowance between you and your husband, or possibly more if you have not used your allowances for the previous year, as well as the option to give tax-free gifts of £250 to as many different people as you would like, it may well be possible to entirely, or at least partly, fund family holidays within your gifting allowance.

If you are already gifting money to your children within your allowances, then this would mean that you won’t be able to use paying for a holiday as a means of giving beyond the annual allowances.

If you are both in good health, then now would be the time to give further gifts to your family, or pay for a holiday, as you will be more likely to live beyond the seven years after the gift was made. 

The later you leave it, the higher the risk of inheritance tax liability further down the line.

One option to consider if you don’t choose to pay for a holiday, is to make the most of your gifting allowance each year to continue giving to your children and their children.

This is Money spoke to two financial advisers to find out what you need to know before taking your family away on holiday.

Chris Peters, independent financial adviser at Flying Colours, replies: Funding family holidays each year is a generous gesture, but it’s important to ensure your own financial future and lifestyle needs are secure. 

With good health and an above-average life expectancy, it’s essential that you find the right balance between maintaining your current expenditure and safeguarding your long-term financial security, before treating your family to holidays.

You should consider your guaranteed income sources, such as state pensions, annuities, or final salary pensions. 

Index-linked annuities can protect against inflation, but if you have a drawdown pension, market downturns could affect your capital, and low-risk funds may not keep up with inflation. 

This could risk your income in retirement, so it’s important to regularly review your income strategies as the years go by.

Your savings may be required for income or for larger, one-off expenses in the future, such as replacing your car. Having enough emergency cash—typically three to six months of living expenses—is essential. 

In short, make sure you retain sufficient funds after paying for family holidays to cover unexpected costs, as well as your day-to-day living expenses.

Family Holidays and HMRC Gifting Rules

In your question, you mention inheritance avoidance. To clarify, inheritance tax will only be payable upon your deaths if your joint estate is worth over £1million. 

If that is the case, then you should pay attention to the HMRC gifting rules before you go ahead and pay for future family holidays.

Paying for family holidays could be considered a gift under HMRC rules, depending on how the payment is structured and the cost of the holiday. 

Please note gifting rules are based on the 2024/25 tax year. Here’s how they may apply:

1. Small Gifts Exemption: You can gift up to £250 per person per year to as many people as you like, but if the holiday costs exceed £250 per person, this exemption doesn’t apply.

2. Annual Gift Exemption: You can gift up to £3,000 per tax year without it being counted toward your estate for inheritance tax purposes. If unused, the exemption can be carried forward to the next tax year, giving you a potential £6,000 allowance.

3. Normal Expenditure Out of Income: If you can afford the holiday from surplus income (after paying living expenses), it could qualify under the normal expenditure out of income exemption. However, you’ll need to keep records to prove that the gift doesn’t affect your standard of living.

4. Potentially Exempt Transfer (PET): If the holiday cost exceeds your exemptions, it may be treated as a PET. If you live for seven years after the gift, it will be exempt from inheritance tax. If you pass away within seven years, the gift may be subject to IHT, though taper relief may apply.

Paying for family holidays may be tax-free if it falls under certain gifting exemptions, such as the annual allowance or small gifts exemption. 

If not, it could be treated as a PET, subject to inheritance tax if you pass away within seven years.

Remember: always ensure your financial needs are protected, keep enough savings for emergencies, and make use of your gifting allowances within each tax year (6 April to 5 April).

Olly Cheng, Financial Planning Director at Rathbones replies: It sounds like you have two different problems here. 

One is how much you can afford to use to help your children and grandchildren, and the second is that when you do help them, you would like it to be tax efficient.

Firstly, if you feel you can afford to bring the whole family on holiday, this is usually a great way to use your money. 

This isn’t because of any tax benefits, but because it is such a fantastic way for all three generations of your family to benefit and have quality time together. 

On top of this, it may well mean your children saving more if they don’t then spend money on a separate holiday they might otherwise have purchased.

Paying for a holiday for the whole family would be a gift for inheritance tax purposes, however, there is a good chance that it would be out of your estate immediately due to the size of the gift. 

You are each entitled to give away £3,000 each year (so £6,000 between you) which falls immediately outside of your estate, as well as smaller gifts of £250 per person each year. 

Also, if your income is more than your normal expenditure, regular gifts out of excess income are immediately outside of your estate. 

These allowances will cover some, if not all, of the cost of bringing your family on holiday. 

If some of the cost does exceed the thresholds, this is nothing to worry about. It wouldn’t be considered tax avoidance but would need to be declared as part of the probate process if you were to die within seven years.

In your circumstances, you both expect to live for more than another seven years given your family history, so inheritance tax shouldn’t be a major worry if you want to have a big family holiday. As long as it is affordable it is a great idea.

In respect of your wider finances, it might be worth undertaking a detailed exercise to see what you will actually need if you live to 100. 

Making a decision now on whether you would be open to equity release or downsizing your home, either as part of your plan or as a last resort, will make a big difference to how much capital you need to hold back for your old age. 

Ultimately doing some proper cashflow forecasting and scenario planning is the best way to avoid any problems down the line, and if done properly will offer you the freedom and peace of mind to give your family more help now. 

Financial planning is always a delicate balance between saving and spending, but giving you the freedom to spend, gift, and enjoy the money that you have worked hard to save is just as important a part of the process as having saved in the first place.