Small Gifts Exemption IHT UK (2026): How to Give Tax-Free Gifts of Up to £250 Per Person

The small gifts exemption is a statutory inheritance tax exemption under IHTA 1984 s.20 that allows a person to make outright gifts of up to £250 per recipient per tax year completely free of IHT. Key rules: (1) AMOUNT: the exemption is £250 per person (per recipient) per tax year (6 April to 5 April). You can give up to £250 to one person, or £250 each to hundreds of people — the exemption applies to each recipient independently; (2) NUMBER OF RECIPIENTS: there is no limit on the number of people you can give to using the small gifts exemption. If you have 50 grandchildren, friends, and employees, you can give each of them £250 in the same tax year using this exemption; (3) ONLY OUTRIGHT GIFTS: the exemption applies to outright gifts only. Gifts into a trust, or gifts with strings attached, are not covered by the small gifts exemption; (4) ONE EXEMPTION APPLIES PER RECIPIENT PER YEAR: if you give someone more than £250, the exemption is not simply reduced — it disappears entirely for that recipient. A gift of £251 to one person does not attract partial exemption; you must look to the annual exemption (£3,000) or other reliefs for the whole amount. In other words: stay within £250 if you want the small gifts exemption to apply — go above it and you must use a different exemption for the full amount; (5) CANNOT COMBINE WITH THE ANNUAL EXEMPTION FOR THE SAME RECIPIENT: the small gifts exemption cannot be combined with the annual exemption (£3,000) for the same recipient. You cannot use the annual exemption to cover the first £3,000 to one person and then the small gifts exemption to cover an additional £250 to the same person in the same tax year. They are mutually exclusive for any individual recipient. However, you can use the annual exemption for one person and the small gifts exemption for a different person in the same year; (6) NO CARRYOVER: unlike the annual exemption (which can be carried forward one year if unused), the small gifts exemption is use-it-or-lose-it for each tax year. It cannot be backdated or applied to a previous year's gifts; (7) SEVEN-YEAR RULE: the small gifts exemption means the gift is immediately exempt — there is no 7-year potentially exempt transfer (PET) period required. If you give someone £250 using this exemption, it is permanently out of your estate for IHT purposes from the moment you make the gift, regardless of when you die.

There are several annual gift exemptions available under the IHTA 1984, and they work differently: (1) SMALL GIFTS EXEMPTION (IHTA 1984 S.20): £250 per recipient per tax year. Unlimited recipients. No 7-year period required. Cannot be combined with the annual exemption for the same recipient. Cannot be carried forward. Applies to outright gifts only. No requirement to evidence; (2) ANNUAL EXEMPTION (IHTA 1984 S.19): £3,000 per donor per tax year. Not per recipient — total across all gifts for the year (though you can allocate it all to one person or split across multiple). Can be carried forward one year if unused (so maximum £6,000 in one year if nothing was used last year). No 7-year period required. Can be given to a trust as well as outright. The annual exemption is exhausted once £3,000 has been used (not per recipient); (3) NORMAL EXPENDITURE OUT OF INCOME (IHTA 1984 S.21): the most powerful and uncapped gifting exemption. No annual limit — gifts can be any amount. Must be made from surplus income (not capital). Must be habitual (regular, not one-off). Must leave the donor with sufficient income for their own normal lifestyle. No 7-year period. Excellent for people with pension income significantly above their expenditure; (4) HOW THEY INTERACT IN PRACTICE: these exemptions are cumulative and can be used in the same year for different people or different purposes. Example: a grandparent with 4 grandchildren could: (a) Use the annual exemption (£3,000) to give £3,000 to one grandchild; (b) Use the small gifts exemption (£250 × 3) to give £750 across the other 3 grandchildren; (c) Use normal expenditure out of income to fund regular standing orders to children without limit. In a two-spouse household, each spouse has their own £3,000 annual exemption and their own small gifts allowance — a couple can give £6,000/year via annual exemption plus £500 per recipient per year via small gifts, in addition to normal expenditure out of income; (5) TOTAL POTENTIAL TAX-FREE GIVING — COUPLE: annual exemption: £6,000 (couple); small gifts: £500 per recipient (couple) × unlimited recipients; normal expenditure out of income: unlimited; PETs: unlimited (7-year clock starts).

A separate IHT exemption applies to gifts made in consideration of marriage or civil partnership (IHTA 1984 s.22). The amount depends on your relationship to the couple: (1) GIFT FROM A PARENT: up to £5,000 per parent. If both parents give, each can give up to £5,000 (£10,000 total from both parents); (2) GIFT FROM A GRANDPARENT or remoter ancestor: up to £2,500; (3) GIFT FROM ONE OF THE PARTIES TO THE MARRIAGE: up to £2,500 (e.g., a gift to the other party); (4) GIFT FROM ANYONE ELSE (friends, non-close family): up to £1,000; (5) KEY CONDITIONS: (a) The gift must be made before the wedding or civil partnership takes place (not after), OR be made at the time of the ceremony. Gifts made after the ceremony do not qualify for the wedding gift exemption (though they may fall within other exemptions); (b) The gift must be 'in consideration of marriage or civil partnership' — it must be clearly linked to the upcoming ceremony; (c) The marriage or civil partnership must actually take place. If the marriage is called off, a conditional gift that was made on that condition is treated as never having been made for exemption purposes; (6) COMBINING WITH OTHER EXEMPTIONS: the wedding gift exemption can be used alongside the annual exemption (£3,000) and the small gifts exemption. Example: a parent gives their child £5,000 as a wedding gift (fully exempt under s.22) plus uses the annual exemption to give another £3,000. Total gift to that child in the year = £8,000 fully exempt. If the annual exemption was carried forward from the previous year, up to £11,000 can be given exempt in the wedding year; (7) INTERACTION WITH SMALL GIFTS: you cannot use the small gifts exemption (£250) for the same person in the same year that you use the wedding gift exemption. The wedding gift exemption fully covers the gift for that recipient in that year (up to the s.22 limit). Any additional gift in the same year would need to use the annual exemption or be a PET.

Regular gifts out of income under IHTA 1984 s.21 (the 'normal expenditure out of income' exemption) operate completely independently from the small gifts exemption. They are different in character and can run in parallel: (1) THE S.21 EXEMPTION — KEY RULES RECAP: gifts qualify if they form part of the donor's normal expenditure; are made from income (not from capital — selling investments, property, or drawing down savings does not count); leave the donor with sufficient income to maintain their usual standard of living. 'Habitual' does not mean lifelong — a pattern of 2–3 years is usually sufficient. There is no annual cap; (2) PRACTICAL EXAMPLES OF COMBINING BOTH: (a) Parent pays for grandchildren's music lessons (£50/month per child = £600/year each): qualifies as normal expenditure out of income if funded from salary or pension income, habitual, and leaves adequate income remaining; (b) Additionally gives £250 Christmas gift to each grandchild: small gifts exemption applies to each recipient independently. These two exemptions are both in play for the same people in the same year — they cover different transactions; (c) Also gives £3,000 lump sum to one adult child (annual exemption): completely separate from s.21 and the small gifts exemption; (3) RECORD-KEEPING FOR S.21: HMRC will ask for evidence of normal expenditure out of income if it is being claimed on the IHT400 after death. Keep records of: bank statements showing the gifts; the donor's income (P60s, pension statements, rental income); evidence that the gifts were made regularly. HMRC Form IHT403 covers gifts and is used to claim s.21 exemption; (4) SMALL GIFTS — NO RECORD-KEEPING REQUIRED: unlike s.21, the small gifts exemption (£250/person/year) requires no formal record-keeping. Modest gifts of up to £250 to family and friends at Christmas, birthdays, and other occasions are simply exempt — no evidence needed, no 7-year clock.

A systematic gifting strategy using all available IHT exemptions can extract significant value from an estate over time — completely free of IHT: (1) STEP 1 — USE THE ANNUAL EXEMPTION FIRST: £3,000 per person per year. If last year's exemption was unused, £6,000 can be given in the current year. Best used for larger lump-sum gifts to a primary beneficiary (adult child or grandchild) where the full £3,000 is most efficiently deployed; (2) STEP 2 — USE SMALL GIFTS FOR WIDER FAMILY: £250 per recipient per year to as many people as you wish. Ideal for: Christmas gifts to each grandchild; birthday gifts to nieces/nephews; regular modest gifts to friends. No record-keeping needed. Immediately exempt; (3) STEP 3 — USE NORMAL EXPENDITURE OUT OF INCOME FOR REGULAR COMMITMENTS: paying school fees; funding ISA contributions; paying insurance premiums for children; covering rent top-ups; standing orders to children. Keep clear records — income vs capital; regularity; standard of living adequacy; (4) STEP 4 — SEVEN-YEAR GIFTING (PETs) FOR LARGER SUMS: larger outright gifts above the annual exemption are PETs. They fall out of the estate completely after 7 years. Taper relief reduces the effective IHT rate between years 3 and 7. Start giving as early as possible — the 7-year clock begins on the date of each gift; (5) STEP 5 — WRITE ALL LIFE INSURANCE IN TRUST: policies in trust fall outside the estate entirely — no IHT on the payout, no waiting for probate; (6) ANNUAL COMBINED POTENTIAL FOR A COUPLE: annual exemption: £6,000 (£3,000 each); small gifts: £500 per recipient (£250 each) × any number of recipients; normal expenditure out of income: unlimited; PETs: unlimited (7-year clock); life insurance in trust: premiums can be covered by s.21 if habitual and from income; (7) DOCUMENTING THE STRATEGY: write a brief annual record of: which exemptions were used; who received each gift; the amount; what income the gift came from (for s.21 claims). One page per year is sufficient. This protects the estate against HMRC challenge and ensures the IHT400 (if needed) can be completed accurately by the executor.