Lifetime Gifts and Inheritance Tax UK: All Exemptions, Rules, and Strategies (2026)
Giving money or assets away during your lifetime can significantly reduce the IHT estate — but different types of gift have very different rules. Some are immediately IHT-free (annual exemption, small gifts, normal expenditure from income). Others need 7 years (PETs). The biggest trap: gifts where you still benefit (gift with reservation — s102 FA1986) — these count as if you never gave anything.
| Exemption / Gift Type | Annual Limit | Recipients | 7-Year Clock? | Carry-Forward? |
|---|---|---|---|---|
| Annual exemption (s19 IHTA 1984) | £3,000/donor/yr | Any (split allowed) | No | Yes — 1yr (max £6k) |
| Small gifts (s20 IHTA 1984) | £250/recipient/yr | Unlimited | No | No |
| Normal expenditure from income (s21 IHTA) | Uncapped (from surplus income) | Any (regular gifts) | No | N/A |
| Wedding gift to child (s22 IHTA) | £5,000 per wedding | Own child's wedding | No | No |
| Wedding gift to grandchild/party (s22) | £2,500 per wedding | Grandchild's wedding | No | No |
| Wedding gift — others (s22 IHTA) | £1,000 per wedding | Any person's wedding | No | No |
| Charitable gift (s23 IHTA 1984) | Uncapped | Qualifying UK charity | No | N/A |
| PET (s3A IHTA 1984) — gift to individual | Uncapped | Individuals only (not trusts) | Yes — 7yr | N/A |
| CLT (gift to trust) | Uncapped (charged at 20% above NRB) | Trusts | 7yr (death recalc) | N/A |
| Gift with reservation (s102 FA1986) | N/A — stays in estate | Not effective | No (GWR clock on cessation) | N/A |
2026/27. Small gifts (s20) and annual exemption (s19) cannot be combined for the same recipient in the same tax year. CLTs: 20% lifetime rate above NRB; recalculated at 40% on death if within 7yr (20% credit). Keep all gift records for the IHT403.
Lifetime Gifts and IHT: Complete Guide
Annual exemption — £3,000 per year (s19 IHTA 1984)
The annual exemption allows each person to give away £3,000 per tax year free of IHT — no 7-year clock, no conditions (beyond the gift being a true gift). Rules: (1) The £3,000 can be given to one person or split across multiple recipients in any proportion; (2) Unused annual exemption from the previous tax year can be carried forward — but only one year's carry-forward is permitted (maximum £6,000 if the prior year was entirely unused); (3) The carry-forward exemption is used after the current year's £3,000 (the current year is used first); (4) The annual exemption cannot be carried forward across multiple years — use it or lose it (beyond one carry-forward year); (5) Both spouses have their own annual exemption — a couple can give £6,000/year (or £12,000 in year 1 with full carry-forward from both). Start using the annual exemption immediately — every year without using it is a year's exemption lost (no further carry-forward). Over 10 years, a couple using £6,000/year removes £60,000 from the estate — saving £24,000 in IHT.
Small gifts exemption — £250 per recipient (s20 IHTA 1984)
The small gifts exemption allows up to £250 per recipient per tax year to an unlimited number of people — immediately IHT-free, no 7-year clock, no carry-forward. The key restriction: cannot be combined with the annual exemption for the same recipient in the same tax year. Practical applications: give £250 each to 20 grandchildren, cousins, and friends — all £5,000 is immediately IHT-free. Give £250 Premium Bonds to each grandchild for Christmas. Give £250 birthday gifts. Each spouse has their own £250 per recipient — a couple can give the same person £500 (£250 each) using the small gifts exemption. Best combined with: annual exemption to children (£3,000) + small gifts exemption to all other recipients (£250 each).
Normal expenditure from income — uncapped, immediately IHT-free (s21 IHTA 1984)
The normal expenditure from income exemption (s21 IHTA 1984) is the most powerful and underused IHT exemption. It is uncapped — there is no upper limit. Three conditions must ALL be met: (1) Habitual (regular pattern): the gifts must be made regularly — a standing order, annual payment, or established pattern of giving. A one-off large gift does not qualify; (2) From income (not capital): the gifts must come from income — salary, pension, rental income, investment dividends. Gifts from savings or capital do not qualify; (3) Maintain normal standard of living: after making the gifts, the donor must retain enough income to maintain their normal standard of living. Record-keeping: HMRC form IHT403 has a specific table for normal expenditure from income claims. Good records (bank statements, gift log, income schedule) are essential — the exemption is lost at death if not documented. Example: retired person with pension income of £60,000/year, living costs of £30,000/year — can give £30,000/year using s21, indefinitely, with no IHT. Over 10 years: £300,000 removed from the estate; IHT saving: £120,000.
PETs — gifts to individuals (s3A IHTA 1984): IHT-free after 7 years
Potentially Exempt Transfers (PETs — s3A IHTA 1984) are gifts to individuals — children, grandchildren, friends, siblings, or anyone who is a natural person (not a company or a trust). The IHT treatment: the gift is IHT-free if the donor survives 7 years from the date of the gift (the date the gift is made, not the date of death). If the donor dies within 7 years: taper relief reduces the IHT on the gift. Years 0-3: full 40% IHT on the amount above the NRB; years 3-4: 32% effective rate; years 4-5: 24%; years 5-6: 16%; years 6-7: 8%; years 7+: 0%. The NRB (£325,000) is set against PETs before IHT applies — so taper only reduces IHT on the amount of the gift above £325,000. Make large PETs as early as possible: the 7-year clock starts on the date of the gift. A £500,000 PET made today (13 June 2026) becomes fully IHT-free on 13 June 2033. PETs must be genuine gifts: no reservation of benefit (s102 FA1986), no conditions, no strings attached.
Wedding and civil partnership gifts (s22 IHTA 1984)
Wedding gifts made in consideration of a marriage or civil partnership are exempt from IHT under s22 IHTA 1984, with the following limits: parent to child: £5,000; grandparent, or a party to the civil partnership/marriage (neither of whom is a parent of the recipient): £2,500; any other person: £1,000. Requirements: the gift must be made in connection with the marriage or civil partnership, and before the ceremony (gifts made after the ceremony do not technically qualify, though HMRC accepts gifts made shortly after the ceremony in practice); the marriage or civil partnership must actually take place — if the wedding is cancelled, the exemption is lost; the gift can be cash, property, or any other asset at market value. The s22 wedding gift exemption is entirely separate from the annual exemption and the small gifts exemption — a parent can give: £5,000 (s22 wedding gift) + £3,000 (s19 annual exemption) + £250 to a different person (s20 small gifts) in the same tax year.
The gift with reservation trap (s102 Finance Act 1986)
The most dangerous pitfall in lifetime giving is the gift with reservation (GWR — s102 Finance Act 1986). If the donor gives away an asset but continues to benefit from it, the gift is treated as never having been made for IHT purposes — the asset remains in the estate at full market value at death. Common GWR situations: gifting the family home to children but continuing to live in it rent-free; giving a bank account to a child but continuing to draw on it; transferring shares into a child's name but continuing to receive dividends. How to avoid GWR: pay a full market rent for continued use of the gifted property (rent is taxable income for the recipient, but removes the GWR); give up all use and benefit of the asset genuinely; use a properly structured Discounted Gift Trust (a trust arrangement where the donor retains a fixed income stream — HMRC accepts this if structured correctly). Important: the 7-year PET clock does NOT run while the GWR continues. The clock only starts when the donor genuinely gives up all benefit.
Record-keeping for lifetime gifts — IHT403
All gifts made in the 7 years before death must be declared on the IHT403 form as part of the estate administration. The IHT403 must disclose: date of gift; nature of the gift (cash, property, shares); value of the gift; recipient; which exemption applies (or PET status). Even gifts covered by the annual exemption or small gifts exemption must be declared — the exemptions are then claimed against them. For normal expenditure from income (s21 IHTA): the IHT403 has a specific table for this exemption — the donor should keep annual records of: income received; gifts made (date, amount, recipient); evidence of surplus income after living costs. HMRC can challenge the s21 exemption if good records are not available. Best practice: keep a gift log (simple spreadsheet) from now — noting each gift made, date, amount, recipient, and which exemption applies.
Frequently Asked Questions
How much can I give away free of inheritance tax each year?
You can give away the following amounts IHT-free each year: Annual exemption (s19 IHTA): £3,000 per donor per year (+ £3,000 carry-forward from the prior year if unused — max £6,000 in year 1). Small gifts (s20 IHTA): £250 per recipient per year, unlimited recipients (but not combinable with the annual exemption for the same person). Normal expenditure from income (s21 IHTA): uncapped — from regular surplus income, habitually, maintaining normal standard of living. Wedding gifts (s22): £5,000 to a child, £2,500 to a grandchild or party, £1,000 to others (in connection with a specific marriage or civil partnership). Larger amounts can be given as PETs (to individuals) — IHT-free if the donor survives 7 years from the date of the gift.
Do I have to tell HMRC about gifts I make during my lifetime?
Not during your lifetime — there is no IHT reporting requirement for gifts while you are alive. However, all gifts made in the 7 years before death must be declared on the IHT403 form (the gifts return, part of the IHT estate administration). The executor completes the IHT403. This is why keeping a gift log during your lifetime is important — the executor will need records to complete the form accurately, and HMRC can challenge undisclosed gifts.
Can I give my house to my children to avoid inheritance tax?
You can give your home to your children, but there are two critical issues: (1) Capital Gains Tax: giving the home to children is a disposal for CGT purposes — if the property has increased in value since you acquired it, and it is not your main residence (s223 TCGA 1992), CGT may be due on the gain; (2) Gift with reservation: if you give the home to children but continue to live in it rent-free, it is a 'gift with reservation' (s102 FA1986) and remains in your estate for IHT — the gift is ignored. To avoid the GWR: pay full market rent for living in the property; or genuinely move out. If structured correctly (move out, or pay market rent), the home is a PET — IHT-free after 7 years.
What is the 7-year rule for gifts?
The 7-year rule applies to Potentially Exempt Transfers (PETs — s3A IHTA 1984): gifts to individuals (not trusts). If the donor survives 7 years from the date of the gift, the PET is IHT-free. If the donor dies within 7 years: taper relief reduces the effective IHT rate. Years 3-4: 32%; years 4-5: 24%; years 5-6: 16%; years 6-7: 8%; 7+ years: 0%. Taper relief only reduces IHT on the amount of the gift above the NRB (£325,000). The 7-year clock starts on the date of the gift, not on any other date.
Can I give money to anyone free of inheritance tax?
Yes — with conditions: annual exemption (s19 IHTA): £3,000/year to any person or persons; small gifts (s20): £250 to as many individuals as you like; normal expenditure from income (s21): any amount from surplus regular income; PETs (s3A): any amount to any individual — IHT-free after 7 years. Gifts to companies, clubs, or most trusts are NOT PETs — they are CLTs (Chargeable Lifetime Transfers), immediately chargeable at 20% if above the NRB.
Lifetime Gifts Work Best Alongside a Well-Drafted Will
Lifetime gifting reduces the estate — but the will determines who gets what remains, and whether the RNRB is claimed. A poorly drafted will can lose up to £70,000 in unnecessary IHT, regardless of how much has been given away during life. WillSafe will kits for England and Wales provide the legal foundation.
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