Inheritance Tax Annual Exemption UK (2026): The £3,000 Gift Allowance and Other Exemptions

The annual exemption is one of the most useful lifetime IHT exemptions: (1) THE BASIC RULE (IHTA 1984 s.19): each person can give away up to £3,000 per tax year (6 April to 5 April) completely free of IHT. The gift is exempt immediately — there is no 7-year clock. If the donor dies the next day, the £3,000 is not in the estate; (2) CARRY FORWARD ONE YEAR: if any of the annual exemption is unused in a given tax year, the unused amount carries forward to the following year — but ONLY for one year. You cannot accumulate unused exemptions indefinitely. Example: 2024-25 — annual exemption £3,000 unused. 2025-26 — annual exemption £3,000 + £3,000 carried forward = £6,000 available. 2026-27 — annual exemption £3,000 only (the 2024-25 unused exemption expired at end of 2025-26); (3) PER PERSON: the annual exemption is personal to each taxpayer. A married couple each has their own £3,000 — meaning they can together give £6,000 per year IHT-free. With carry forward: up to £12,000 in one year (if neither used their exemption the prior year); (4) HOW IT IS APPLIED: the annual exemption is applied against gifts in the order they are made during the year. HMRC applies the annual exemption first before considering the 7-year PET clock. A gift that falls within the annual exemption is fully exempt — it does not reduce the NRB and does not start any taper period; (5) WHAT THE EXEMPTION COVERS: any gift to any person, charity, or company. Cash, assets, land, shares, jewellery. There is no restriction on who the recipient must be — unlike the small gifts exemption, the annual exemption can be given in whole or in part to one person; (6) PRACTICAL USE: consistent annual gifting is one of the most effective long-term IHT strategies. A married couple each gifting £3,000/year from age 70 to 85 removes £90,000 per person (£180,000 combined) from the estate — equivalent to a £72,000 IHT saving (at 40%) with no risk, no 7-year clock, and no complexity.

The small gifts exemption (IHTA 1984 s.20) is a separate and additional exemption: (1) THE RULE: gifts of £250 or less to any number of people in any tax year are IHT-exempt — with no limit on the number of recipients; (2) THE KEY DISTINCTION FROM THE ANNUAL EXEMPTION: (a) The small gifts exemption applies per recipient — you can give £250 to 100 different people in one year (total: £25,000) without using any annual exemption; (b) The annual exemption applies per donor — the £3,000 is your total pot for the year, and it can go to one person or split across several; (c) THEY CANNOT BE COMBINED FOR THE SAME GIFT: if you give someone £3,000 using the annual exemption, you cannot use the small gifts exemption for an additional £250 to the same person in the same year. You use one or the other per recipient per year — not both; (3) PRACTICAL EXAMPLE: grandparent gives: £3,000 to adult child (annual exemption); £250 to each of 8 grandchildren (£2,000 total — small gifts exemption, 8 separate exemptions); £250 to 5 nephews/nieces (small gifts exemption). Total gifted IHT-free: £3,000 + £2,000 + £1,250 = £6,250. No 7-year clock on any of these; (4) CANNOT EXCEED £250 PER RECIPIENT under the small gifts exemption: a gift of £251 to one person cannot use the small gifts exemption at all — the entire gift must either fall within the annual exemption or start the 7-year PET clock; (5) INCOME OR CAPITAL: unlike the normal expenditure exemption (s.21), which requires gifts to come from income, the small gifts exemption and annual exemption can be funded from either income or capital.

Gifts made in consideration of marriage or civil partnership are IHT-exempt under IHTA 1984 s.22 — up to specified limits: (1) LIMITS BY RELATIONSHIP TO THE RECIPIENT: (a) Parent of bride or groom: up to £5,000 per child's marriage; (b) Grandparent or remoter ancestor: up to £2,500; (c) Party to the marriage (gift between spouses-to-be): up to £2,500; (d) Any other person (uncle, aunt, friend, employer): up to £1,000; (2) CONDITIONS: (a) The gift must be made in consideration of the marriage — typically before the ceremony or at the time of the ceremony. A gift made after the wedding cannot use this exemption even if intended as a wedding gift; (b) The marriage must actually take place. If the marriage is cancelled, the exemption is lost and the gift may be treated as a PET; (c) WHAT COUNTS: cash, cheques, assets. Wedding gift lists (store accounts). Contributions to house deposits. The form of the gift does not matter, only the timing and connection to the marriage; (3) IN COMBINATION WITH OTHER EXEMPTIONS: the wedding gift exemption is separate from the annual exemption. You can make a £5,000 wedding gift (fully exempt) AND separately use your annual £3,000 exemption in the same tax year on different gifts; (4) PRACTICAL EXAMPLE: parent gives adult child a wedding gift of £5,000. That gift is fully IHT-exempt under s.22. The parent can ALSO gift another £3,000 (or £6,000 with carry forward) to other beneficiaries under the annual exemption in the same year. Total IHT-free gifting: £8,000-£11,000 (wedding year only); (5) ANNUAL LIMITS: the £5,000 parent limit applies per marriage, not per year — it cannot be exceeded even if the wedding spans two tax years.

The normal expenditure out of income exemption (IHTA 1984 s.21) is distinct from all the annual allowances and is the most powerful IHT exemption available to high-income individuals: (1) THE KEY DIFFERENCES: (a) UNLIMITED AMOUNT: there is no cap on the s.21 exemption. A person with £100,000 of surplus income could gift all of it under s.21 each year — exempt immediately, no 7-year clock, no NRB impact; (b) MUST COME FROM INCOME: the annual exemption (s.19) and small gifts exemption (s.20) can be funded from income or capital. The s.21 exemption MUST come from income — pension income, employment income, rental income, investment income. Gifts from capital savings do not qualify; (c) MUST BE REGULAR AND NORMAL: the annual exemption can be a one-off each year — it does not need to be part of a pattern. The s.21 exemption requires a regular, habitual pattern of gifting as part of the donor's normal lifestyle. A first-ever gift is harder to claim under s.21; (d) LIFESTYLE REQUIREMENT: after making the gift, the donor must retain sufficient income for their own normal standard of living. The annual exemption has no such requirement; (2) HOW THEY WORK TOGETHER: the annual exemption and s.21 exemption are entirely separate. A person can use both in the same year on the same gift program: the first £3,000 of annual gifting uses the annual exemption; anything above that (provided conditions met) uses s.21 if funded from surplus income; (3) WHICH TO USE FIRST: HMRC generally applies the annual exemption first (in order of gifts made during the year). For a regular gifting program, the first £3,000/year falls under the annual exemption automatically; the remainder (if paid from surplus income under a regular pattern) falls under s.21; (4) DOCUMENTATION: the annual exemption requires no specific evidence — HMRC simply accepts it. The s.21 exemption is claimed on IHT403 (gifts form) and requires evidence: annual income; normal living costs; gifts made; surplus remaining. Keep a simple annual record to protect the executor's claim; (5) COMBINED ANNUAL PLANNING: the most effective annual gifting strategy typically uses ALL available exemptions: Annual exemption: £3,000 (per donor). Small gifts: £250 per recipient (unlimited recipients). Wedding gifts (where applicable). Normal expenditure: unlimited from surplus income. In a good year, a married couple with comfortable pension income could legitimately remove £30,000-£50,000+ from their combined estate annually with no 7-year clock.

Beyond the annual, small gifts, and normal expenditure exemptions, several other lifetime exemptions apply: (1) CHARITABLE GIFTS (IHTA 1984 s.23): gifts to UK-registered charities are IHT-exempt — whether made during lifetime or via will. No limit. No 7-year clock. For gifts on death: if 10% or more of the net estate passes to charity, the IHT rate on the remainder drops from 40% to 36%; (2) GIFTS TO POLITICAL PARTIES (IHTA 1984 s.24): exempt if the party has at least 2 MPs or 1 MP and over 150,000 votes at the last general election. No limit; (3) GIFTS TO HOUSING ASSOCIATIONS (IHTA 1984 s.24A): exempt if for social housing purposes; (4) GIFTS FOR NATIONAL PURPOSES (IHTA 1984 s.25): gifts to bodies such as the National Trust, British Museum, National Gallery, and other listed bodies are fully exempt; (5) MAINTENANCE OF FAMILY (IHTA 1984 s.11): a separate and important exemption — reasonable gifts for the maintenance, education, or training of a child or former spouse are not transfers of value at all. This covers: school fees; university costs; supporting an elderly dependent relative; maintenance for a dependent child under 18 or in full-time education; (6) POTENTIALLY EXEMPT TRANSFERS (IHTA 1984 s.3A): not a complete exemption — PETs are lifetime gifts to individuals that become fully exempt if the donor survives 7 years. If the donor dies within 7 years, IHT tapers: 0-3 years: full IHT charge (100%); 3-4 years: 80%; 4-5 years: 60%; 5-6 years: 40%; 6-7 years: 20%; 7+ years: 0% (fully exempt). PETs do not use the annual exemption (the annual exemption is applied first, then the PET treatment applies to the excess); (8) THE NRB AS A LIFETIME TOOL: on death, the NRB (£325,000) is applied first against any CLTs (chargeable lifetime transfers — mainly gifts into discretionary trusts) made in the 7 years before death. The NRB acts as a buffer — only gifts exceeding the NRB within 7 years attract IHT on death.