← Knowledge Base | Help Sheets | Gifting Rules & Exemptions

Gifting Rules & Exemptions

Gifting is one of the most accessible and widely used tools for reducing the value of an estate for Inheritance Tax purposes. But for UK taxpayers, the rules are specific — and sometimes widely misunderstood. This help sheet sets out the main exemptions, how they work, how they interact with each other, and what to watch out for. For the authoritative position, the government's own guidance is referenced throughout.

What a gift is — for IHT purposes

A gift, for Inheritance Tax purposes, is any transfer of value made without receiving equivalent value in return. Money given to a child. A property transferred to a grandchild. Assets moved out of an estate without full consideration. If the transfer reduces the value of the estate — and nothing of equivalent value is received in return — it is a gift.

Not all gifts are treated the same. Some fall outside the estate immediately. Others start a seven-year clock. Others are taxable at the point of transfer. The type of gift, who receives it, and what exemption applies determines which category it falls into.

GOV.UK — Inheritance Tax and gifts →

The Annual Exemption

Each tax year, every individual can give away up to £3,000 without it forming part of their estate for IHT purposes. This exemption falls outside the estate immediately — there is no seven-year clock to run. If the annual exemption is not fully used in one tax year, the unused amount can be carried forward to the following year — but only one year. The maximum that can be given under the annual exemption in any single year is therefore £6,000, combining the current year's allowance with an unused prior year allowance. Married couples and civil partners each have their own annual exemption — so a couple can give away up to £6,000 per year between them, or up to £12,000 if both prior year allowances were unused.

GOV.UK — Annual exemption →

Small Gifts Exemption

Gifts of up to £250 per person per tax year can be made to any number of recipients without IHT implications. There is no limit on the number of recipients — only on the amount per recipient. The small gifts exemption cannot be combined with the annual exemption for the same recipient. If the annual exemption has been used for a particular person, the small gifts exemption does not apply to further gifts to that same person in the same tax year.

GOV.UK — Small gifts exemption →

Wedding & Civil Partnership Gifts

Gifts made in consideration of a marriage or civil partnership are exempt up to specified limits — depending on the relationship between the giver and the recipient:

- Parent - Up to £5,000

- Grandparent or remoter ancestor - Up to £2,500

- Party to the marriage (to the other party) - Up to £2,500

- Anyone else - Up to £1,000

The gift must be made on or shortly before the wedding or civil partnership — not after. If the ceremony does not take place, the exemption falls away and the gift may become chargeable. Keep a record of when the gift was made and in what context.

GOV.UK — Wedding and civil partnership gifts →

Gifts to Spouses & Civil Partners

Gifts between spouses and civil partners are exempt from IHT without limit — provided the recipient is UK domiciled. There is no cap, no seven-year clock, and no reporting requirement at the time of the gift. This exemption also applies on death — assets passing to a surviving spouse or civil partner are exempt from IHT entirely, regardless of value.

Where the recipient is not UK domiciled, the exemption is capped. The non-domiciled spouse can elect to be treated as UK domiciled for IHT purposes — which removes the cap but brings their worldwide assets within the scope of UK IHT. This is a decision that requires careful advice in each individual case.

GOV.UK — Gifts to spouses and civil partners →

Gifts to Charity

Gifts to qualifying charities are exempt from IHT without limit — at any point during a lifetime or on death. In addition, if at least 10% of the net estate passes to a qualifying charity on death, the IHT rate on the remainder of the estate reduces from 40% to 36%. For larger estates, this can produce a significant saving — and in some cases, leaving a charitable legacy costs the estate very little because of the rate reduction it triggers.

GOV.UK — Reduced IHT rate for charitable donations →

Gifts Out of Surplus Income

This is one of the most powerful and most underused exemptions available — and one of the least understood. A gift made out of surplus income — as part of a regular pattern of giving, from income rather than capital — can fall outside the estate immediately, with no seven-year clock and no upper limit on the amount.

Three conditions must be met. The gift must come from income — not from savings, investments, or capital. It must leave the donor with sufficient income to maintain their usual standard of living. And it must form part of the donor's normal expenditure — meaning it is habitual rather than a one-off.

What the rules do not define — and why that matters. The legislation does not define how much "surplus" income must be. It does not define how frequently gifts must be made to be considered "normal." There is no minimum amount and no minimum frequency set in statute. What matters is the pattern and the intention — that the gifts are made regularly, from income, as part of the donor's established giving. HMRC will look at the overall picture. A man or woman who pays their grandchildren's school fees from their monthly pension income, year after year, with records kept, is in a very different position from someone who makes a large one-off transfer and describes it as normal expenditure.

Record keeping is essential for this exemption. Without clear records showing that gifts were made regularly, from income, and that the donor's standard of living was maintained, HMRC may challenge the exemption on death. The form to complete on death — IHT403 — asks specifically about gifts and their source. Good records make the difference between the exemption being accepted and being challenged.

"A grandmother pays her grandchildren's school fees directly from her monthly pension income — £800 per month, every month, for five years. She has done this consistently, it has not affected her lifestyle, and she has kept clear records of each payment. This is normal expenditure out of income — and every one of those payments falls outside her estate immediately, with no seven-year clock."

GOV.UK — HMRC guidance on normal expenditure out of income →

Potentially Exempt Transfers (PETs)

Any gift made to another individual — that does not fall within one of the exemptions above — is a Potentially Exempt Transfer. A PET is not immediately chargeable to IHT. But it is not immediately exempt either. It becomes exempt only if the donor survives seven years from the date of the gift. If the donor dies within seven years, the PET becomes chargeable — and is brought back into the calculation of IHT on the estate.

The seven-year clock starts from the date the gift is made — the date assets are genuinely transferred and control relinquished. A gift where the donor retains benefit is not a PET — it is a gift with reservation of benefit, which is treated as though it never left the estate.

GOV.UK — Potentially exempt transfers →

How PETs interact with the Nil Rate Band — a common misconception

This is the point that surprises most people — and one of the most important things to understand about gifting and IHT.

The Nil Rate Band — currently £325,000 per person — is the threshold below which no IHT is paid on death. Most people assume that taper relief is what reduces the IHT on a gift made within seven years. This is not correct. Taper relief only applies once the Nil Rate Band has been used up entirely by the gifts made within seven years of death.

Here is how it actually works. When someone dies, HMRC looks back seven years and identifies all chargeable transfers — PETs that have become chargeable because the donor did not survive seven years. These gifts are added together and set against the Nil Rate Band first. Only once the Nil Rate Band is exhausted does any IHT become payable on those gifts — and only then does taper relief reduce the rate on gifts made between three and seven years before death.

Example. A man has a Nil Rate Band of £325,000. He made a gift of £200,000 four years before his death. His estate on death is worth £400,000. The £200,000 gift uses £200,000 of the Nil Rate Band. The remaining £125,000 of the Nil Rate Band is set against the estate. The remaining £275,000 of the estate is taxed at 40%. The gift itself — at four years — attracts no additional IHT, because it sits within the Nil Rate Band. Taper relief has not reduced the IHT on the gift. The Nil Rate Band has absorbed it entirely. Taper relief would only have been relevant if the gift had exceeded the Nil Rate Band.

The practical implication is this: for most people whose gifts are within the Nil Rate Band, taper relief is irrelevant. It is the Nil Rate Band that does the work — not the sliding scale. Taper relief matters for larger estates where gifts have exceeded the Nil Rate Band threshold. For smaller gifts, the key question is simply whether the donor survived seven years — because if they did, the gift falls outside the estate entirely.

Taper relief — reduction in IHT rate on gift above NRB

0–3 years - No reduction — 40% applies

3–4 years - 20% reduction — 32% effective rate

4–5 years - 40% reduction — 24% effective rate

5–6 years - 60% reduction — 16% effective rate

6–7 years - 80% reduction — 8% effective rate

7+ years - Fully exempt — 0%

GOV.UK — Taper relief on gifts →

Gifts with Reservation of Benefit

A gift with reservation of benefit is not a genuine gift for IHT purposes. If a man or woman gives away an asset — a property, an investment, a sum of money — but continues to benefit from it, HMRC treats the asset as still forming part of the estate. The gift is ignored. The asset is included in the estate on death at its value at that point — not at the value when the "gift" was made.

The most common example is a property. A man gives his home to his children but continues to live in it rent-free. Because he has retained the benefit of the property — living there, using it — the gift fails for IHT purposes. The property remains in his estate.

The exception is S102B — where a share of a property is gifted to someone who genuinely occupies it alongside the donor. This is covered in detail in the S102B Gift Planning help sheet.

GOV.UK — Gifts with reservation of benefit →

Chargeable Lifetime Transfers

Not all gifts are PETs. Gifts into most trusts — including discretionary trusts — are Chargeable Lifetime Transfers. Unlike PETs, CLTs are taxable at the point of transfer if the cumulative value of CLTs in the previous seven years exceeds the Nil Rate Band. The rate at the point of transfer is 20% — half the death rate. If the donor dies within seven years of making the CLT, further tax may become due at the full rate — subject to taper relief — less the lifetime tax already paid.

For most lifetime trust planning, the structure is designed to ensure the value transferred does not exceed the available Nil Rate Band at the time — avoiding the immediate charge. This is why the £325,000 threshold is central to how APT+ and SEAPT arrangements are structured.

GOV.UK — Chargeable lifetime transfers →

Record Keeping

Good record keeping is not optional — it is essential. HMRC requires the executors of an estate to report gifts made within seven years of death on the IHT403 form. Without clear records, the executors may not know what gifts were made, when, to whom, and on what basis. HMRC may challenge exemptions that cannot be evidenced. Gifts that should have been exempt — particularly normal expenditure out of income — may be included in the taxable estate simply because the records to support the exemption are not there.

A simple gift record — noting the date of each gift, the amount, the recipient, and the exemption relied upon — takes minutes to maintain and can save significant amounts on death. Keep bank statements, payment records, and any correspondence that evidences the gift and its basis.

GOV.UK — IHT403 form and guidance →