Understanding how gifts are taxed in the UK is essential for inheritance tax planning. There is no standalone gift tax, but gifts can trigger inheritance tax if you die within seven years. Fortunately, several generous exemptions allow you to give away significant amounts completely tax-free.
The Basics: How Gifts and IHT Interact
When you die, HMRC adds up the value of your estate — including certain gifts made in the previous seven years — to calculate inheritance tax. If the total exceeds the nil rate band (currently £325,000), the excess is taxed at 40%.
Gifts made more than seven years before death are completely excluded. This is the foundation of IHT planning through lifetime giving.
Tax-Free Gift Allowances
Annual Exemption — £3,000
Each person can give away up to £3,000 per tax year free of IHT. This can go to one person or be split between several.
If you did not use the previous year’s annual exemption, you can carry it forward for one year — giving you a maximum of £6,000 in one year (then back to £3,000 the following year).
Small Gifts Exemption — £250
You can give up to £250 to any number of different people each tax year, provided you have not used another exemption for the same person.
Wedding and Civil Partnership Gifts
Special exemptions apply to gifts made in connection with a marriage or civil partnership:
| Giver | Tax-Free Amount |
|---|---|
| Parent | £5,000 |
| Grandparent or great-grandparent | £2,500 |
| Anyone else | £1,000 |
These are in addition to the annual exemption and small gifts exemption.
Gifts from Normal Income
One of the most valuable but underused exemptions. If you can demonstrate that a gift comes from your regular income (not capital), does not reduce your standard of living, and is part of a regular pattern, it is completely exempt from IHT regardless of the amount.
Examples:
- Monthly contributions to a grandchild’s Junior ISA
- Paying a child’s school fees from your pension income
- Regular Christmas and birthday gifts from income
Keep records showing the pattern and that the gifts do not affect your standard of living.
Gifts to Spouse or Civil Partner
Gifts between spouses and civil partners are completely exempt from IHT, with no upper limit. However, this only defers the IHT issue — the surviving spouse’s estate will eventually be assessed.
Gifts to Charities
Gifts to registered charities are fully exempt from IHT. Leaving at least 10% of your estate to charity reduces the IHT rate on the rest from 40% to 36%.
The 7-Year Rule
Gifts that exceed the annual exemptions are called potentially exempt transfers (PETs). These:
- Are completely free of IHT if you survive 7 years
- May be subject to taper relief if you die between 3 and 7 years
- Are subject to the full 40% rate if you die within 3 years
Taper Relief
| Years Between Gift and Death | IHT Rate Applied |
|---|---|
| 0–3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% |
Important: Taper relief only applies if the total value of gifts exceeds the nil rate band (£325,000). If lifetime gifts plus the nil rate band cover the gifts, no IHT is due whether or not taper relief applies.
Gifts with Reservation of Benefit
A gift with reservation of benefit is one where you give something away but continue to benefit from it. The most common example is giving your house to your children while continuing to live in it.
HMRC ignores such gifts for IHT purposes — the asset remains in your estate. To make an effective gift of property:
- You must move out entirely, or
- Pay full market rent if you wish to continue using it
This is a complex area. Professional advice is essential before gifting property.
Planning Your Giving
Use Exemptions Every Year
| Exemption | Annual Amount | 10-Year Total (couple) |
|---|---|---|
| Annual exemption | £3,000 each = £6,000 | £60,000 |
| Small gifts (10 recipients each) | £2,500 each = £5,000 | £50,000 |
| Normal expenditure from income | Varies | Potentially unlimited |
A married couple using their annual exemptions consistently can remove £60,000 from their estate over 10 years — with zero IHT risk.
Make Larger Gifts Early
If you plan to make significant gifts (above the exemptions), make them as early as possible to start the 7-year clock. At the same time, ensure you retain enough to maintain your own standard of living.
Keep Records
HMRC may ask for evidence of gifts after your death. Keep:
- Records of all gifts made, with dates and amounts
- Evidence that gifts from income are regular and do not affect your standard of living
- Bank statements showing the pattern
- Declarations from recipients
Read our full inheritance tax guide for the complete picture of IHT planning, including the nil rate band, residence nil rate band, and strategies for reducing your estate’s tax liability.