IHT Annual Gifting Strategy: Maximising Exemptions to Reduce Inheritance Tax
Systematic annual gifting is the simplest and most reliable way to reduce an estate over time. The £3,000 annual exemption, small gift exemption, marriage gifts, and the unlimited normal expenditure out of income exemption are all immediately outside IHT — no 7-year wait. Combined with strategic Potentially Exempt Transfers, a couple can remove tens of thousands per year from their estates completely free of IHT.
IHT Gifting Exemptions 2026/27
Annual exemption
£3,000 per donor per tax year
Any gift(s) totalling up to £3,000 per tax year per donor are exempt from IHT — no 7-year wait. Unused annual exemption can be carried forward one year only. A couple can each use £3,000/year = £6,000/year combined. If the previous year's exemption was unused, the current year's transfer can use both years (£6,000 per person, £12,000 per couple). The annual exemption applies regardless of how many recipients the gifts are split between.
Small gift exemption
Up to £250 per recipient per tax year
Gifts of £250 or less to any number of individuals are exempt — there is no limit on the number of recipients. The £250 limit is per recipient per tax year (6 April to 5 April). The small gift exemption cannot be combined with the annual exemption for the same recipient: you cannot give one person £3,250 by using both (the £3,000 annual exemption covers a gift to that person; the £250 small gift exemption applies to different recipients who receive £250 or less).
Normal expenditure out of income
Unlimited — must be from income, habitual, and leave sufficient income for normal lifestyle
Under IHTA 1984 s21, gifts that form part of normal expenditure out of income are fully exempt from IHT with no limit and no 7-year wait. Three conditions: (1) the gift is made as part of a normal pattern of giving (not an isolated one-off); (2) the gift is made from income (not capital); and (3) after making the gift, the donor retains sufficient income to maintain their usual standard of living. Evidence is essential: keep schedules of income and gifts, and contemporaneous correspondence confirming the pattern. A wealthy retiree contributing £20,000/year towards a grandchild's education or a child's mortgage payments from investment income can potentially do so entirely outside IHT.
Marriage and civil partnership gifts
£5,000 (parent), £2,500 (grandparent), £1,000 (any other person)
Gifts made in consideration of a marriage or civil partnership are exempt up to the limits: £5,000 from each parent of either party, £2,500 from a grandparent or great-grandparent, £1,000 from anyone else (including siblings, aunts, uncles, and friends). The gift must be made before or on the day of the marriage or civil partnership. Multiple donors can each give up to their limit to the same couple. A couple receiving wedding gifts from both sets of parents (£5,000 each = £20,000) plus £2,500 from four grandparents (£10,000) plus £1,000 from multiple friends can receive substantial sums free of IHT.
Maintenance payments
Unlimited — for dependent relative, child in education, or spouse
Under IHTA 1984 s11, gifts for the maintenance of a family member are exempt where they are: reasonable provision for the care or maintenance of a dependent relative (e.g. an elderly parent who cannot maintain themselves); reasonable maintenance of the donor's spouse or civil partner; or reasonable provision for a child under 18 or in full-time education. There is no monetary limit — 'reasonable' provision for the specific person is the test. A parent paying university accommodation costs, tuition, or living expenses for a student child is making a s11 exempt payment — no annual limit, no 7-year wait.
Potentially Exempt Transfers (PETs)
Unlimited — exempt if donor survives 7 years
Any gift to an individual (not into a trust or company) is a PET. A PET is: (a) completely outside IHT if the donor survives 7 years after the gift; (b) partially chargeable if the donor survives 3–7 years (taper relief reduces the IHT by 20–80%); (c) fully chargeable at 40% if the donor dies within 3 years. PETs are not immediately exempt — but for healthy donors with reasonable life expectancy, PETs are the most powerful tool for large-scale estate reduction. There is no annual limit on PETs. A gift of a £500,000 investment portfolio is a PET — it is completely outside the estate if the donor survives 7 years.
Practical Example: Maximising Annual Gifting
Scenario: A retired couple with pension income of £70,000/year, an estate worth £1.5m, two adult children, and four grandchildren.
Annual exemption: £3,000 each = £6,000/year combined (immediately exempt).
Small gifts: £250 × 4 grandchildren × 2 donors = £2,000/year (immediately exempt).
Normal expenditure out of income: After living costs (£45,000/year), the couple has £25,000 surplus income. If they gift £20,000/year to their children in a regular pattern and retain £5,000+ surplus — the £20,000 is immediately exempt under s21 (no 7-year risk).
Total immediately exempt per year: £6,000 + £2,000 + £20,000 = £28,000 — with no 7-year clock running.
Over 10 years: £280,000 removed from the estate at no IHT risk. At 40% IHT, this saves £112,000 in IHT for the children.
On top: if the couple each makes PETs of £50,000 to their children and survives 7 years, a further £100,000 is outside the estate — saving £40,000 in IHT.
Frequently Asked Questions
How much can I give away each year free of Inheritance Tax?
The starting point is the £3,000 annual exemption per donor per tax year — any gifts totalling up to £3,000 are completely exempt, no 7-year wait required. If you did not use the previous year's annual exemption, you can carry it forward for one year: this allows up to £6,000 in the current year if the entire previous year was unused. A married couple each has their own annual exemption — combined that is £6,000/year (or up to £12,000 if both carried forward a previous year). On top of the annual exemption, you can give up to £250 to as many individuals as you like without limit (small gift exemption) — but not the same person who received the £3,000. You can also make gifts from your income under the s21 normal expenditure exemption — potentially unlimited, provided the gifts are habitual, from income, and leave you enough income for your normal lifestyle. Many UK families are not systematically using all of these exemptions — even a couple consistently gifting £6,000/year over 15 years (plus carried-forward amounts) removes £90,000+ from their estate free of IHT.
What is the normal expenditure out of income exemption and how do I qualify?
The normal expenditure out of income exemption (IHTA 1984 s21) is the most powerful exempt gifting mechanism for wealthy retirees and those with investment income. It has no monetary cap — provided three conditions are met: (1) The gifts must form part of a pattern of normal giving. 'Normal' means habitual — a commitment to give regularly, not an isolated lump sum. Ideally, gifts should be made annually for at least 2–3 years before they are clearly part of a normal pattern. HMRC looks at the history of giving. (2) The gifts must be made from income, not capital. Income includes: salary, pension income, rental income, dividends, interest, and trust income. Selling shares or property and gifting the proceeds is a capital gift — it does not qualify. Income must be identified from your annual income receipts, not your accumulated wealth. (3) After the gifts, you must retain enough income to maintain your normal standard of living. You do not have to reduce your lifestyle at all — if your income comfortably covers both your living costs and the gifts, you meet this test. Keeping a contemporaneous schedule (or asking your accountant to prepare one each year) is essential — HMRC requires evidence of all three conditions on the IHT400.
How does the 7-year rule work for Potentially Exempt Transfers?
A Potentially Exempt Transfer (PET) is any gift from one individual to another individual (not into a trust). At the time of the gift, the PET is 'potentially' exempt — it becomes fully exempt only if the donor survives 7 years from the date of the gift. If the donor dies within 7 years, the PET is brought back into the estate for IHT calculation, but taper relief reduces the IHT charge: 0–3 years: 100% of the IHT rate (40%). 3–4 years: 80% (effective IHT rate 32%). 4–5 years: 60% (effective IHT rate 24%). 5–6 years: 40% (effective IHT rate 16%). 6–7 years: 20% (effective IHT rate 8%). After 7 years: 0% — the PET is fully exempt and outside the estate. Taper relief applies to the IHT on the PET value, NOT to the value of the PET itself. Multiple PETs in the same 7-year period are cumulated: the donor's nil rate band (£325,000) is shared across all chargeable transfers in the 7 years before death. Keeping records of all PETs (date, amount, recipient) is essential for accurate IHT calculation.
Can I give away large sums to my children each year free of IHT?
Yes — large gifts to children are PETs, and PETs become fully exempt after 7 years. For a donor in good health with a reasonable life expectancy, making substantial PETs to adult children early is the most effective way to reduce the estate. Each PET starts a separate 7-year clock from the date of that gift. Key points: (1) There is no annual limit on PETs — a £500,000 gift to a child today is a PET; if the donor survives 7 years, it is entirely outside the estate. (2) PETs do not use the annual exemption — the £3,000 annual exemption is separate. (3) Keep accurate records of every PET: date, value, recipient, and nature of the gift. The IHT400 requires this information. (4) PETs must be genuine outright gifts — the donor must not retain any benefit (living rent-free in a gifted property is a Gift with Reservation of Benefit under FA 1986 s102 and is not a PET). (5) CGT may be triggered on the disposal of non-cash assets — unless holdover relief is available. Many donors gift cash savings or investment portfolios — cash gifts have no CGT implications.
Should I use the annual exemption first, or should I focus on PETs?
Both serve different purposes. The annual exemption (£3,000/year) and small gifts exemption (£250 per recipient) are immediately exempt — no 7-year risk, no record-keeping burden beyond noting the gifts were made. Use these every year as a matter of course. PETs (large gifts to individuals) are the main driver for significant estate reduction — the £3,000 annual exemption is a small tool; PETs can remove hundreds of thousands from the estate. The practical approach: (1) Use the annual exemption and small gift exemption each year automatically. (2) For income-producing individuals: set up regular gifts out of income under s21 — these are unlimited and immediately exempt. (3) For capital-rich estates: consider making substantial PETs early. The sooner the 7-year clock starts, the sooner the gifts are fully outside the estate. (4) Document everything. Poorly documented gifts cause disputes and missed exemption claims on the IHT400. The biggest mistake is doing nothing for years and then making large gifts late in life when 7-year survival becomes uncertain.
What records should I keep of gifts for IHT purposes?
HMRC expects executors to disclose all lifetime gifts on Form IHT403 (Gifts and other transfers of value). The records you should keep during your lifetime: (1) Date and value of each gift. (2) Name of recipient. (3) Description of what was given (cash, investment portfolio, property, etc.). (4) Which exemption applies (annual exemption, normal expenditure, PET). (5) For normal expenditure out of income: a contemporaneous schedule showing your income for the year, your living expenses, the gifts made, and the surplus — ideally prepared annually with your tax return. (6) Bank statements showing outgoing payments to family members. (7) Any professional advice about the gifting. Keeping an annual gift register in a file with your will and other estate documents is strongly recommended. When you review your will, review your gifts register too.
Start with a Will
Gifting strategies work best alongside a well-drafted will. Your will governs what remains in the estate — ensuring it is structured to use every available IHT allowance.
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