Gifting money during your lifetime is one of the most effective ways to reduce the inheritance tax (IHT) bill your family faces when you die. But HMRC has strict rules about what counts as a tax-free gift, what gets added back into your estate, and what happens if you die within seven years of giving money away.
This guide explains exactly how gifts interact with UK inheritance tax, the exemptions available, and how to use them strategically.
How Inheritance Tax Works on Gifts
In the UK, inheritance tax is charged at 40% on the value of your estate above the nil-rate band of £325,000. When you die, everything you own — property, savings, investments, possessions — is added together to calculate your estate’s value.
Gifts you’ve made during your lifetime can be added back in. This is where the rules get complicated.
The Three Categories of Lifetime Gifts
Exempt gifts. These are immediately outside your estate and never come back in, no matter when you die.
Potentially exempt transfers (PETs). These fall outside your estate only if you survive for seven years after making the gift. Die within seven years and they’re added back in.
Chargeable lifetime transfers. These are immediately subject to IHT if they exceed the nil-rate band, and may incur an additional charge of up to 25% during your lifetime.
Most gifts to family and friends fall into the first two categories.
Gift Exemptions You Can Use Every Year
HMRC allows several exemptions that let you give money away tax-free, without it counting towards your estate.
Annual Gift Exemption: £3,000 Per Year
You can give away up to £3,000 per tax year without it being added to your estate. This is the most commonly used exemption.
Key rules:
- You can give the full £3,000 to one person or split it between several people
- If you don’t use the full £3,000 in a tax year, you can carry forward one unused year — so up to £6,000 in the first year you start gifting
- The gift must be a genuine transfer, not a loan
- You can use this exemption every year for the rest of your life
Example: You give your daughter £3,000 in June 2026 and £3,000 to your son in December 2026. Neither gift is added to your estate for IHT purposes, regardless of when you die.
Small Gifts Exemption: £250 Per Person
You can give up to £250 per person per tax year, with no limit on the number of recipients.
Key rules:
- This is separate from the £3,000 annual exemption — so you can give someone £250 on top of a larger gift
- Must be to different people from those receiving gifts under the £3,000 exemption
- Useful for grandchildren, nieces, nephews, or friends
Example: You give each of your five grandchildren £250 for Christmas. None of these gifts are added to your estate.
Wedding and Civil Partnership Gifts
Special allowances apply for gifts made in connection with a marriage or civil partnership:
| Recipient | Maximum Tax-Free Gift |
|---|---|
| Son or daughter | £5,000 |
| Grandchild or great-grandchild | £2,500 |
| Anyone else | £1,000 |
Key rules:
- These are one-off gifts per marriage, not annual allowances
- You can combine this with the £3,000 annual exemption and the £250 small gift exemption
- Must be given on or shortly before the wedding day
- If the marriage doesn’t take place, the gift still qualifies if it was made in contemplation of the marriage
Example: Your daughter gets married. You give her £5,000 as a wedding gift, £3,000 under your annual exemption, and £250 to her partner under the small gifts exemption. Total: £8,250, all IHT-free.
Gifts From Surplus Income
This is one of the most powerful — and most overlooked — exemptions. You can give away unlimited amounts from your regular income, provided you can demonstrate that the gift doesn’t affect your standard of living.
Key rules:
- Must come from your regular income, not savings or capital
- Must not reduce your ability to maintain your normal standard of living
- Should be a regular pattern of gifting, not a one-off lump sum
- HMRC may ask for evidence if your estate is large
Example: You have a pension income of £2,500 per month and expenses of £1,800. You give your son £500 per month from the surplus. This is a legitimate gift from surplus income and is completely exempt from IHT, regardless of when you die.
This exemption has no upper limit and can be used to transfer significant wealth over time, particularly for those with substantial pension income.
Gifts to Charities
Unlimited gifts to registered charities are exempt from IHT. There’s no cap and no seven-year rule — they’re immediately outside your estate.
Additional benefit: If you leave at least 10% of your estate to charity in your will, the IHT rate on the rest of your estate drops from 40% to 36%.
Example: Your estate is worth £500,000. Without charitable giving, IHT is calculated on £175,000 (£500,000 minus £325,000 nil-rate band) = £70,000 tax. Leave £50,000 to charity and the remaining estate of £450,000 is taxed at 36% on £125,000 = £45,000 tax. Saving: £25,000.
Potentially Exempt Transfers: The Seven-Year Rule
If you give a gift that doesn’t fall under one of the exemptions above — for example, a lump sum to a child — it’s classified as a potentially exempt transfer (PET).
How PETs Work
- Survive 7 years: The gift is completely outside your estate. No IHT is due.
- Die within 7 years: The gift is added back into your estate and may be subject to IHT.
Taper Relief
If you die between 3 and 7 years after making a gift, taper relief reduces the IHT rate on that gift. The longer you survive, the less tax is due:
| Years Between Gift and Death | IHT Rate on Gift |
|---|---|
| 0-3 years | 40% (full rate) |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| 7+ years | 0% (exempt) |
Important: Taper relief only applies if the total value of gifts exceeds the nil-rate band. If your gifts are within the £325,000 threshold, no IHT is due regardless of timing.
Worked Example: Parent Gifts £100,000
A parent gifts £100,000 to their child in 2026. They die in 2030 — four years later.
Estate at death: £400,000
IHT calculation without the gift:
| Component | Value |
|---|---|
| Estate | £400,000 |
| Nil-rate band | -£325,000 |
| Taxable amount | £75,000 |
| IHT at 40% | £30,000 |
IHT calculation with the gift added back in:
| Component | Value |
|---|---|
| Estate | £400,000 |
| Gift (added back in) | +£100,000 |
| Total | £500,000 |
| Nil-rate band | -£325,000 |
| Taxable amount | £175,000 |
| IHT at 40% | £70,000 |
The gift adds £40,000 to the IHT bill. However, because the death occurred in years 4-5, taper relief reduces the rate to 24% on the gift portion.
Revised calculation with taper relief:
| Component | Value | Tax Rate | Tax |
|---|---|---|---|
| Estate (no gift) | £400,000 | 40% on £75,000 | £30,000 |
| Gift (£100,000) | £100,000 | 24% (year 4-5) | £24,000 |
| Total IHT | £54,000 |
Without the gift, IHT would have been £30,000. With the gift and taper relief, total IHT is £54,000. The effective tax rate on the £100,000 gift is £24,000 — not the full £40,000 it would have been if death occurred within three years.
The family still received £100,000 during the parent’s lifetime, and the additional IHT cost was £24,000 — meaning the gift saved the family £76,000 compared to leaving that money in the estate.
Gifts That Are Always Exempt
Some gifts are never added to your estate, regardless of when you die:
- Gifts between UK spouses or civil partners
- Annual gift exemption (£3,000)
- Small gifts (£250 per person)
- Wedding gifts (within limits)
- Gifts from surplus income
- Gifts to UK registered charities
- Gifts to political parties
- Normal birthday and Christmas presents
- Payments for maintenance of family (elderly parents, children under 18)
- Life insurance policies written in trust
Gifts With Reservation of Benefit
If you give a gift but continue to benefit from it, HMRC may treat it as still being part of your estate. This is called a “gift with reservation of benefit.”
Common examples:
- You gift your house to your children but continue to live in it rent-free
- You give money to family but they let you use it whenever you want
- You transfer investments but continue to receive the income
The rule: If you give something away but keep using or benefiting from it, it’s still in your estate for IHT purposes.
Exception: You can give your home to your children if you pay a full market rent to live there. This makes it a genuine gift, but you need to be able to afford the rent from your other income.
Planning Strategies
Start Early
The seven-year rule means you need to plan well in advance. A gift made at age 65 won’t be fully exempt until age 72. The earlier you start gifting, the more time you give the seven-year clock to run.
Use Your Annual Exemptions Every Year
£3,000 per year may seem modest, but over 20 years that’s £60,000 (or £120,000 as a couple) completely outside your estate — plus any growth on that money.
Combine Exemptions
Stack your gifts using multiple exemptions:
- £3,000 annual exemption
- £250 small gift exemption to each recipient
- Wedding gifts when applicable
- Gifts from surplus income
A couple with three children and five grandchildren can gift substantial amounts each year using all available exemptions.
Keep Records
HMRC may challenge your estate after death. Keep records of:
- How much you gifted
- Who received it
- When it was given
- Which exemption applied
- Evidence that surplus income gifts didn’t affect your standard of living
Consider Life Insurance in Trust
If you’re concerned about IHT on gifts within seven years of death, a life insurance policy written in trust can cover the potential tax bill. The payout goes directly to your beneficiaries and doesn’t form part of your estate.
Common Mistakes
- Not using annual exemptions. Every year you don’t gift up to £3,000, you’re wasting a tax-free allowance permanently.
- Gifting too late. Gifts within three years of death face the full 40% IHT rate with no taper relief.
- Forgetting the surplus income exemption. This is unlimited and one of the most powerful tools available.
- Giving without records. Your executors will need documentation to prove which exemptions apply.
- Gifts with reservation. Giving away your house but continuing to live there for free won’t work — HMRC will treat it as part of your estate.
- Ignoring the 10% charity threshold. A charitable gift can reduce the IHT rate on the rest of your estate from 40% to 36%.
Key Takeaways
- The annual gift exemption of £3,000 is the most accessible tool — use it every year
- Gifts from surplus income have no upper limit if you can afford them from regular income
- Potentially exempt transfers fall outside your estate after seven years
- Taper relief reduces the IHT rate on gifts made 3-7 years before death
- Gifts to charity are unlimited and can reduce the overall IHT rate on your estate
- Start early, keep records, and combine multiple exemptions for maximum impact
This article is for general information only and does not constitute tax or financial advice. Inheritance tax rules can change, and individual circumstances vary. For personalised guidance, consult a qualified tax adviser or financial planner.