Using Expected Value Thinking to Tackle a £250,000 Gifting Dilemma

In financial planning, as in poker, decisions often come down to managing risk, weighing probabilities, and calculating expected value. That might sound technical, but it’s really just a smart way of comparing outcomes – and it can be particularly helpful when navigating the complex world of Inheritance Tax (IHT) and Capital Gains Tax (CGT).

Let me explain with a real-life case study (details changed for confidentiality).

The Dilemma

A couple in their early seventies came to us with a very reasonable goal: they wanted to reduce the potential Inheritance Tax on their estate and help their children by gifting a £250,000 buy-to-let (BTL) property now, rather than leaving it as part of their estate.

But there was a snag.

Gifting the property would trigger an immediate Capital Gains Tax bill of £20,000. Understandably, the clients were hesitant. Their concern was this: What if we don’t survive the seven years required for the gift to fall outside our estate for IHT purposes? We’d have paid £20,000 in tax and gained nothing.

This is where a bit of maths – and some poker-style thinking – came into play.

Thinking in Probabilities, Like a Poker Player

In poker, you rarely know for sure whether you’re making the “right” decision. Instead, you make decisions based on expected value – a simple concept that weighs the outcomes of a decision based on their probabilities.

We applied the same principle here.

Step One: Estimate the Odds

Using the ONS life expectancy calculator, we found that each of them had roughly a two-thirds chance of surviving seven more years. That meant a one-third chance that at least one of them would not survive the full seven years and therefore the gift wouldn’t be fully exempt from IHT.

Step Two: Calculate the Outcomes

• If they survive seven years: The £250,000 property is outside of their estate, and they save 40% of that amount in IHT – a saving of £100,000.
• If they don’t survive seven years: The gift is not fully exempt, and they’ve paid £20,000 in CGT for no IHT benefit.

Step Three: Calculate Expected Value

We crunched the numbers:

• 2/3 probability of saving £80,000* = £53,333
• 1/3 probability of “losing” £20,000 = -£6,666

*£100,000 IHT Saving LESS the £20,000 CGT

Net expected value: £66,666 – £6,666 = £46,673

In other words, the potential IHT saving made this a financially strong move on average despite the CGT bill.

Conclusion: It’s a Good Bet

Of course, life isn’t lived “on average” – and financial planning is about more than maths. Emotions, risk tolerance, and family dynamics all play a role. But by thinking like a poker player – weighing the odds and calculating the expected value – we helped our clients see that this move wasn’t reckless. It was, in fact, a smart play: a downside of just £20,000 versus an upside of £100,000.

And that’s before we even factor in the future growth of the property or the rental income it might generate over the coming years – both of which would also fall outside their estate if the gift is successful. In effect, the potential tax-saving benefit only grows with time.

In uncertain situations, it pays to have a clear framework for decision-making. And sometimes, that framework involves a bit of poker logic.

Please note: Tax planning is not a regulated activity. This example is for illustrative purposes only and should not be relied upon as personal financial advice. Always seek advice tailored to your individual circumstances.