UK Inheritance Tax: Annual, Small Gift, and Wedding Exemptions

UK inheritance tax gift exemptions let you move money and assets out of your estate during your lifetime without a 40% tax charge waiting at the end. The main ones are a £3,000 annual exemption, unlimited £250 small gifts to different people, wedding gifts on a tiered scale, unlimited transfers between spouses or civil partners, regular gifts from surplus income, and gifts to charities and political parties. Anything larger falls under the seven-year rule, where the gift stays in your estate unless you survive long enough afterward.

The £3,000 Annual Exemption

You can give away up to £3,000 in total each tax year without those gifts being added back to your estate for inheritance tax purposes.¹ The £3,000 can go to one person or be split among several. Spouses and civil partners each have their own £3,000, so a couple can give away £6,000 between them every year. The tax year runs from 6 April to the following 5 April, and the allowance resets each April.

Gifts inside this allowance are immediately exempt. They come out of your estate the moment they are made, with no need to survive a set number of years afterward. That is what makes it the simplest planning tool available.

Carrying Forward an Unused Allowance

If you don’t use all of your £3,000 in one tax year, the unused portion carries forward, but only to the next year.¹ It cannot roll further than that. If you gave nothing in 2024–25, you could give up to £6,000 in 2025–26 by combining that year’s allowance with the carried-forward amount. Anything left after 2025–26 disappears.

There’s an ordering rule to watch. You must use the current year’s exemption first before touching any carried-forward balance.² Give away £2,000 in a year where you also have £3,000 carried forward, and HMRC treats the £2,000 as coming from the current year. What carries into the next year is the £1,000 of unused current-year allowance, not the older balance, which expires.

The £250 Small Gift Allowance

Separately from the £3,000, you can give up to £250 to as many different people as you like in a tax year, free of inheritance tax.³ There is no cap on the number of recipients. Birthday and holiday gifts to friends and extended family are the usual use.

The limit is per recipient, and it’s all-or-nothing. Give someone more than £250 across the tax year under this allowance and the whole gift loses its exempt status, not just the excess. A £251 gift cannot be split into a £250 small gift plus £1 of something else.

You Cannot Combine It With the Annual Exemption

The £250 allowance and the £3,000 allowance cannot both apply to the same person in the same tax year.⁴ Give a relative any part of your £3,000 and the £250 allowance is off the table for them. Give them £250 as a small gift and they are outside the £3,000 for the rest of that year. Practically, decide early in the year who gets what from which allowance.

Wedding and Civil Partnership Gifts

A separate exemption applies to gifts made in connection with a wedding or civil partnership ceremony. The tax-free limit depends on how you’re related to one of the people getting married:⁵

Parents can give up to £5,000 each, per wedding.
Grandparents and great-grandparents can give up to £2,500 each, per wedding.
Anyone else can give up to £1,000 per wedding.

Each limit is per donor, per wedding. Two grandparents can give £2,500 each for a combined £5,000. Wedding gifts can be stacked with the £3,000 annual exemption to the same person, but not with the £250 small gift allowance.⁴ If the wedding is called off, the gift loses its exempt status, because the exemption depends on the marriage actually happening.

Gifts Between Spouses and Civil Partners

Gifts between spouses or civil partners are generally exempt from inheritance tax with no upper limit.⁶ You can transfer assets of any value during your lifetime or on death without triggering tax, provided both partners are long-term UK residents. Where the giver is a long-term UK resident but the recipient is not, the exemption is capped at the nil-rate band, currently £325,000.⁷

One point often missed: this exemption defers the tax rather than eliminating it. Assets you leave to your spouse enter their estate and will face inheritance tax when they die, unless other exemptions or reliefs apply then. Couples who leave everything to each other with no further planning often end up with a larger combined estate at the second death.

Regular Gifts From Surplus Income

This is the most powerful gift exemption and the one most people overlook. Regular gifts made out of your surplus income can be fully exempt from inheritance tax with no annual cap.⁸ There is no £3,000 ceiling and no seven-year survival requirement. Three conditions must all be met:

The gifts have to be part of your normal pattern. Habitual or regular, not one-off. Paying a grandchild’s school fees every term qualifies; a single lump sum at graduation is harder to defend.
The money must come from income (earnings, pension, rental income, dividends, and so on), not from selling assets or drawing down savings.
Your standard of living must stay the same after making the gifts. You need enough income left to maintain your usual lifestyle.

Proving this exemption after the giver has died is where executors run into trouble. HMRC will want income and expenditure figures for every tax year the gifts were made. Form IHT403 asks for a detailed breakdown of salary, pensions, investment income, household bills, and other spending to test whether there was genuine surplus.⁹ Keep a running record during your lifetime rather than leaving your family to reconstruct it.

Charity and Political Party Gifts

Gifts to registered charities and qualifying political parties are fully exempt, during your lifetime and on death, with no monetary limit.⁴ There is an additional incentive at death: leave at least 10% of your net estate to charity in your will, and the inheritance tax rate on the rest of the taxable estate drops from 40% to 36%.¹⁰ On a large estate, the four-percentage-point cut can save beneficiaries more than the donation itself costs.

Larger Gifts and the Seven-Year Rule

Any gift that goes beyond your available exemptions becomes a potentially exempt transfer. Survive seven years after making it and the gift drops out of your estate entirely.⁴ Die within seven years and the gift’s value is added back to your estate and counted against the £325,000 nil-rate band.

Taper relief reduces the tax rate on gifts made between three and seven years before death, but only where the total of gifts in those seven years exceeds the £325,000 threshold. The sliding scale:

0 to 3 years before death: full 40%
3 to 4 years: 32%
4 to 5 years: 24%
5 to 6 years: 16%
6 to 7 years: 8%
7 years or more: 0%

Taper relief cuts the tax on the gift itself, not the tax on the rest of the estate, which stays at 40% above the threshold.⁷ This is why the immediately exempt gifts covered above matter so much. A gift sheltered by the annual exemption or the small gift allowance never enters the seven-year clock in the first place.

Gifts With Reservation of Benefit

Giving something away on paper while still using it does not reduce your estate. HMRC treats these as “gifts with reservation,” and the asset stays in your estate for tax purposes as though the gift never happened.¹¹ Common examples include giving your home to a child while continuing to live there rent-free, or signing over a holiday property you still use.⁴

For the gift to work, the recipient must take full possession and enjoyment, and the giver must be entirely excluded from benefit. Paying full market rent to live in a house you’ve given away can satisfy the rules, but the arrangement has to be genuinely commercial rather than a token gesture. Get advice before acting.

Keeping Records

When someone dies, executors use form IHT403 to report lifetime gifts to HMRC.¹² Gifts fully covered by the annual exemption, the small gift allowance, or the spouse exemption do not need to appear on the form.⁹ Everything else made on or after 18 March 1986 must be disclosed.

For each gift, record the date, the value or description of the asset, the recipient, and which exemption applies. For gifts claimed as normal expenditure out of income, keep the income and expenditure figures for each tax year alongside them.

Penalties for Unreported Gifts

Failing to report lifetime gifts on the IHT return can trigger penalties calculated against the underpaid tax. HMRC separates careless errors from deliberate concealment. Careless mistakes carry penalties of up to 30% of the lost tax, deliberate inaccuracies up to 70%, and deliberate concealment up to 100%.¹³ Coming forward before HMRC starts asking questions reduces the penalty.

Late filing of the IHT account carries a fixed £100 penalty, plus another £100 if the account is still missing after six months. After twelve months, additional monthly penalties apply on a sliding scale tied to the tax liability, up to £3,000.¹³ HMRC also charges interest on unpaid inheritance tax at 7.75% as of January 2026.¹⁴ Penalties and interest together add up quickly, which is another reason to keep gift records as you go.

1
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 19
2
GOV.UK. Inheritance Tax Manual – IHTM14144 – Lifetime Transfers: Annual Exemption: Roll Over Provisions
3
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 20
4
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
5
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 22
6
GOV.UK. Inheritance Tax Manual – IHTM11032 – Spouse or Civil Partner Exemption
7
GOV.UK. Inheritance Tax
8
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 21
9
HM Revenue and Customs. Schedule IHT403 – Gifts and Other Transfers of Value
10
GOV.UK. Inheritance Tax Reduced Rate Calculator
11
Legislation.gov.uk. Finance Act 1986 – Section 102
12
GOV.UK. Inheritance Tax: Gifts and Other Transfers of Value (IHT403)
13
GOV.UK. Inheritance Tax Manual – IHTM36023 – Late Accounts: Penalties Chargeable
14
GOV.UK. Rates and Allowances: Inheritance Tax Thresholds and Interest Rates