IHT Annual Exemption UK (2026): The £3,000 Inheritance Tax Gift Allowance Explained

The IHT annual exemption is set out in IHTA 1984 s.19. It allows every individual to make gifts of up to £3,000 in each tax year (6 April to 5 April) that are IMMEDIATELY EXEMPT from inheritance tax — there is no 7-year survival requirement: (1) THE AMOUNT: £3,000 per person per tax year. This figure has not changed since 1981 and has been criticised as inadequate by the Office of Tax Simplification (OTS) — but no increase has been legislated as of June 2026; (2) IMMEDIATELY EXEMPT: unlike a PET (potentially exempt transfer — a gift that requires the donor to survive 7 years to be fully IHT-free), the annual exemption is IMMEDIATELY exempt. Even if the donor dies the next day, gifts covered by the annual exemption are outside the estate; (3) CAN BE APPLIED TO ANY GIFT: the annual exemption can be applied to any gift — cash, property, shares, or any other asset. It can be applied to a single gift of £3,000 or spread across multiple smaller gifts totalling £3,000; (4) ONE PER PERSON: the £3,000 annual exemption is personal — each spouse or civil partner has their own separate £3,000 exemption. A married couple can each give £3,000 per year — £6,000 between them annually — immediately exempt; (5) TAX YEAR BASIS: the exemption runs on the HMRC tax year (6 April to 5 April) — not the calendar year. If you want to maximise gifting in one go, making gifts around the end of the tax year and the start of the new tax year can use two years' exemptions in quick succession; (6) CANNOT BE SPLIT: the annual exemption cannot be split across different types of gift. It is applied to gifts in the order they are made. Once £3,000 has been used up in a tax year, further gifts in that year fall into the PET or CLT regime.

The CARRY-FORWARD rule under IHTA 1984 s.19(3) allows any UNUSED annual exemption from the previous tax year to be carried forward — but only for ONE year: (1) THE CARRY-FORWARD RULE: if you do not use all of your £3,000 annual exemption in a tax year, you can carry the unused portion forward to the NEXT tax year only. You CANNOT carry it forward for two or more years — any unused exemption from more than one year ago is simply lost; (2) HOW IT WORKS — CURRENT YEAR EXEMPTION USED FIRST: when applying the exemption, the CURRENT YEAR'S exemption is always used first. Only after the current year's full £3,000 has been used can the prior year's unused exemption be applied: (a) EXAMPLE: in 2024/25 you gave away nothing (unused exemption = £3,000). In 2025/26 you give away £5,000. You apply £3,000 of the current year's exemption first, then £2,000 of the carried-forward 2024/25 exemption. The full £5,000 is immediately exempt. No PET arises; (b) EXAMPLE: in 2024/25 you gave away £1,000. Unused = £2,000. In 2025/26 you gave away £7,000. Current year exemption = £3,000 (fully used). Prior year carryforward = £2,000. Total immediately exempt = £5,000. The remaining £2,000 is a PET — 7-year clock applies; (3) MAXIMUM IN ANY ONE YEAR: combining the current year exemption (£3,000) and the maximum carryforward (£3,000 — if nothing was given away the prior year) gives a maximum of £6,000 immediately exempt in any one tax year per person. For a couple: £12,000 between them in one year using both prior years' exemptions; (4) NO DOUBLE CARRY-FORWARD: if you did not use your exemption in 2023/24 OR 2024/25, you cannot carry forward two years' worth. Only one year's unused exemption can be in the pool at any time.

Several additional IHT gift exemptions exist for specific types of gift — each applies separately from the £3,000 annual exemption: (1) SMALL GIFTS EXEMPTION (IHTA 1984 s.20): any gift of £250 or less to ANY ONE PERSON in a tax year is immediately exempt. Key points: (a) there is no limit on the number of different people you can give £250 to — you can give £250 to 100 different people and all 100 gifts are exempt; (b) you CANNOT use the small gifts exemption and the annual exemption on the same gift to the same person — if you give £3,250 to one person, you cannot treat £3,000 as the annual exemption and £250 as the small gift exemption (the two cannot be combined for a single recipient); (c) the £250 limit per person is a ceiling — a gift of £251 to one person gets NEITHER the small gifts exemption NOR the annual exemption on that excess; (2) MARRIAGE AND CIVIL PARTNERSHIP EXEMPTION (IHTA 1984 s.22): gifts made in consideration of a marriage or civil partnership are immediately exempt up to the following amounts depending on the relationship: (a) PARENT of a party to the marriage/CP: £5,000; (b) GRANDPARENT (or remote ancestor) of a party: £2,500; (c) PARTY TO THE MARRIAGE THEMSELVES (gifts between the couple): £2,500; (d) ANYONE ELSE: £1,000. The gift must be made: (i) in consideration of the marriage — it must be conditional on the marriage actually taking place; (ii) before or at the time of the marriage — a gift made after the wedding is NOT exempt under s.22. Multiple givers can each give their limit independently; (3) NORMAL EXPENDITURE FROM INCOME (IHTA 1984 s.21): this is the most generous exemption for those with surplus income — see next question.

The NORMAL EXPENDITURE FROM INCOME exemption under IHTA 1984 s.21 is the most powerful IHT gifting exemption for people with regular surplus income. It is immediately exempt — no 7-year survival needed — and has no annual cap: (1) THE THREE CONDITIONS (ALL MUST BE MET): for a gift to qualify under s.21, it must satisfy all three conditions: (a) it must form part of the donor's NORMAL EXPENDITURE — i.e. it must be part of a regular pattern of giving (not a one-off). 'Normal' means habitual, regular — a single large gift may not qualify, but a series of regular annual or monthly gifts usually will; (b) it must be made out of INCOME — not out of capital. The donor must have enough income (after tax) to fund the gifts without reducing their standard of living; (c) the donor must be left with SUFFICIENT INCOME TO MAINTAIN THEIR USUAL STANDARD OF LIVING after making the gifts. If the gifts deplete income to the point where the donor would be unable to meet their living expenses from income alone, they fail this test; (2) NO CAP ON AMOUNT: unlike the annual exemption (£3,000 cap), the normal expenditure from income exemption has NO UPPER LIMIT. A person with substantial investment income who regularly gives away £50,000 per year from that income can claim the full £50,000 as immediately exempt under s.21 — provided all three conditions are met; (3) EVIDENCE — KEEP RECORDS: HMRC requires evidence that the s.21 conditions are met. The donor (or their personal representatives after death) should keep: (a) records of income (tax returns, dividend vouchers, bank statements showing regular income); (b) records of the gifts made (amounts, dates, recipients); (c) a schedule of expenditure showing that living costs are met from income and gifts are surplus; (4) INTERACTION WITH ANNUAL EXEMPTION: the normal expenditure from income exemption and the annual exemption are SEPARATE — they can both apply in the same year. If a person gives away £3,000 under the annual exemption AND makes further regular gifts from income totalling £10,000, all £13,000 may be immediately exempt. The exemptions are cumulative, not alternative; (5) COMMON USES: regular premium payments into a life insurance trust; regular cash gifts to children to help with living costs; regular contributions to grandchildren's ISAs or savings.

Understanding how gift exemptions interact with the PET regime is essential for effective IHT planning: (1) ORDER OF APPLICATION: when a gift is made, exemptions are applied in a specific order to determine whether the gift is immediately exempt or falls into the PET/CLT regime: (a) annual exemption (s.19) is applied first — if the gift is within the £3,000 annual exemption (plus any carryforward), it is immediately exempt and does NOT become a PET; (b) other specific exemptions (small gifts, marriage exemption, normal expenditure) apply independently of the annual exemption; (c) any amount of the gift NOT covered by an exemption becomes a POTENTIALLY EXEMPT TRANSFER (PET) — starting the 7-year clock; (2) GIFTS COVERED BY ANNUAL EXEMPTION ARE NOT PETS: a gift of £3,000 covered by the annual exemption is NOT a PET. It does not appear in the cumulative 7-year running total for IHT. It is simply outside the IHT regime; (3) GIFTS PARTIALLY COVERED: if a gift of £5,000 is partly covered by the £3,000 annual exemption, only £2,000 is a PET. The £3,000 exempt portion is removed; the remaining £2,000 is a PET and starts the 7-year clock. If the donor dies within 7 years, the £2,000 PET is added back to the estate for IHT; (4) TAPER RELIEF: if the donor survives 3 or more years after a PET that becomes chargeable (because they die within 7 years), taper relief reduces the IHT payable on the PET. Taper relief does NOT reduce the value of the PET — it reduces the rate at which IHT is charged on it: 3-4 years: 80% of full rate; 4-5 years: 60%; 5-6 years: 40%; 6-7 years: 20%. Gifts fully covered by the annual exemption are exempt from this regime entirely; (5) HMRC FORM IHT403: the annual exemptions, small gifts, and normal expenditure exemptions must be reported by the personal representatives on form IHT403 (Gifts and other transfers of value) when applying for probate and completing the IHT400. Records kept during the donor's lifetime are essential for completing this form accurately.