Gifting money or assets to loved ones is one of the most natural things in the world. Whether you are helping your children onto the property ladder, contributing to a grandchild’s education, or simply sharing your good fortune with family and friends, generosity is a virtue that most of us wish to exercise freely. Yet in the United Kingdom, the tax implications of gifting are more nuanced than many people realise — and getting them wrong can leave a nasty inheritance tax bill for your estate, or worse, for the very people you were trying to help.
Contrary to popular belief, the UK does not have a standalone ‘gift tax’ in the way that, say, the United States does. There is no separate levy that kicks in the moment you hand over a cheque. Instead, gifts are primarily governed by Inheritance Tax (IHT) rules, which means the tax consequences of your generosity may not be felt until after you have passed away — sometimes up to seven years later.
This guide explains exactly how much you can give away tax-free each year, which exemptions apply, how the seven-year rule works, and what steps you should take to protect your family from an unexpected tax burden. Whether you are a parent, grandparent, business owner, or simply someone who wants to plan ahead, understanding the rules around gifting is an essential part of good financial planning.
Understanding Gifts for Tax Purposes
What Counts as a Gift?
For tax and inheritance purposes, HMRC defines a gift broadly as any transfer of value — money, property, or possessions — made to another person without receiving something of equivalent value in return. This definition is deliberately wide, and it catches far more than the birthday envelope stuffed with cash.
Common examples of gifts include:
- Cash transfers, whether by bank transfer, cheque, or physical currency
- Transferring ownership of property, such as a house, flat, or buy-to-let investment
- Forgiving or writing off a debt that someone owes you
- Selling an asset at below its market value — the difference counts as a gift
- Putting assets into a trust for the benefit of others
- Valuable items such as jewellery, artwork, antiques, or vehicles
However, not every transfer of value is treated as a gift. Payments made in exchange for goods or services at a fair commercial rate are not gifts. Normal household expenditure that one family member covers on behalf of another — such as paying a spouse’s utility bills — is also typically excluded. HMRC looks at the substance of a transaction rather than its label, so dressing up a gift as something else rarely succeeds.
Why Gift Tax Rules Exist
The core purpose of the gift rules is straightforward: without them, wealthy individuals could simply give everything away before they died and thereby avoid Inheritance Tax entirely. HMRC’s interest in gifts stems directly from this concern. By attaching potential tax liability to large gifts made within seven years of death, the rules are designed to ensure that significant transfers of wealth do not escape the IHT net entirely.
At the same time, Parliament has built in a range of sensible exemptions — recognising that ordinary acts of generosity, such as wedding gifts and small tokens of affection, should not create bureaucratic headaches for ordinary families. Understanding which of these exemptions applies to your situation is the key to gifting both generously and tax-efficiently.
UK Gift Allowances and Exemptions
HMRC operates a tiered system of exemptions, each with its own rules and limits. Used intelligently and in combination, these exemptions can allow individuals to transfer significant sums over time without triggering any Inheritance Tax liability whatsoever.
Annual Exemption
The annual exemption is the cornerstone of tax-free gifting in the UK. Each tax year (running from 6 April to 5 April), every individual can give away up to £3,000 in total without any Inheritance Tax consequences whatsoever. This £3,000 can be given to a single recipient or split across multiple people — it is the total amount that matters, not the number of recipients.
One particularly useful feature of the annual exemption is the carry-forward rule. If you do not use all of your £3,000 allowance in a given tax year, the unused portion can be carried forward to the following tax year — but only for one year. This means that if you made no gifts in 2024/25, you could give away up to £6,000 in 2025/26 without any IHT exposure, by combining the current year’s allowance with the one carried forward.
To illustrate: suppose you gave nothing in 2024/25. In 2025/26 you can give £3,000 (current year) plus £3,000 (carried forward) = £6,000 in total, free of any IHT liability. However, if you then fail to use the full £3,000 in 2025/26, you cannot carry that unused portion forward again — the carry-forward rule applies to one year only.
Small Gifts Exemption
Separately from the annual exemption, you may give up to £250 per person, per tax year, to as many different people as you like, entirely free of Inheritance Tax. This small gifts exemption is designed to cover everyday tokens of generosity — birthday presents, Christmas gifts, and similar occasions.
The critical point to note is that the small gifts exemption cannot be combined with the annual exemption for the same recipient. In other words, you cannot use the £250 small gifts exemption to top up an annual exemption gift made to the same person. Each recipient can benefit from either the annual exemption or the small gifts exemption, but not both in the same tax year.
Wedding and Civil Partnership Gifts
Wedding gifts — and gifts to mark a civil partnership — benefit from a special, one-off exemption that varies depending on your relationship to the couple. The gift must be made on or shortly before the wedding or civil partnership ceremony, and the ceremony must actually take place for the exemption to apply.
The tax-free limits are as follows:
- Parents of the bride or groom: up to £5,000 per parent
- Grandparents and great-grandparents: up to £2,500
- Other relatives and friends: up to £1,000
These limits apply per donor, not per couple. A couple’s parents can therefore each contribute £5,000, giving a combined parental gift of up to £10,000 with no IHT exposure. These wedding exemptions can also be combined with the annual exemption and the small gifts exemption, potentially allowing larger tax-free transfers around significant family events.
Regular Gifts Out of Income
Perhaps the most powerful and underused exemption available is the ‘normal expenditure out of income’ exemption. This exemption has no financial cap — in theory, you could give away hundreds of thousands of pounds each year under this provision, entirely free of Inheritance Tax, as long as you meet the qualifying criteria.
To qualify, the gifts must meet all three of the following conditions:
- They must form part of your normal expenditure — meaning they are made regularly and as part of an established pattern, not as a one-off.
- They must be made out of income, not capital. You cannot draw down savings or investments to fund these gifts.
- After making the gifts, you must be left with sufficient income to maintain your usual standard of living.
Typical examples include paying a grandchild’s school fees termly, making monthly contributions to a child’s rent, or funding a child’s savings or pension on a regular basis. The key is regularity and the source being income rather than capital. HMRC may scrutinise claims to this exemption on death, so meticulous record-keeping is essential.
Gifts Between Spouses and Civil Partners
Transfers between spouses and civil partners who are both domiciled in the UK are completely exempt from Inheritance Tax, with no upper limit. You can give any amount to your spouse or civil partner during your lifetime, or leave everything to them in your will, without triggering any IHT liability.
There is an important caveat, however: if your spouse or civil partner is domiciled outside the UK, the exemption is limited to a cumulative total of £325,000. Beyond that, the usual IHT rules apply. Domicile is a complex legal concept distinct from residence, and if there is any doubt about your or your partner’s domicile status, specialist legal advice is strongly recommended.
Gifts to Charities and Political Parties
Gifts to qualifying charities — whether made during your lifetime or on death through your will — are fully exempt from Inheritance Tax, regardless of the amount. Similarly, gifts to registered UK political parties that meet certain parliamentary representation criteria are also fully exempt.
For charitable gifts to qualify, the recipient must be a recognised charity under UK law. There is an additional benefit: if you leave at least 10% of your net estate to charity in your will, the IHT rate on the taxable remainder of your estate is reduced from 40% to 36%. It is worth ensuring that all charitable gifts are properly documented — retaining the charity’s registration details and any correspondence confirming the gift.
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Inheritance Tax and Gifts
The Seven-Year Rule
Beyond the specific exemptions outlined above, any gift that does not qualify for an exemption — sometimes referred to as a ‘chargeable transfer’ — is not immediately subject to IHT at the time it is made. Instead, it enters a seven-year window during which it could become liable to IHT if the donor dies.
If the donor survives for seven full years after making the gift, it falls entirely outside of their estate for IHT purposes. No tax will be due on that gift, regardless of its size. If, however, the donor dies within seven years, the gift is added back to the estate for IHT calculation purposes, and tax may become due — paid by the recipient, not the estate.
The rate of IHT on gifts made within seven years benefits from taper relief, which reduces the effective tax rate the longer the donor survives after making the gift:
- 0–3 years before death: 40% IHT (full rate)
- 3–4 years before death: 32% IHT (20% reduction)
- 4–5 years before death: 24% IHT (40% reduction)
- 5–6 years before death: 16% IHT (60% reduction)
- 6–7 years before death: 8% IHT (80% reduction)
- 7+ years before death: 0% IHT — fully exempt
It is worth noting that taper relief only applies to the IHT on the gift itself, and only where the gift exceeds the nil-rate band (currently £325,000). If the total value of gifts falls within the nil-rate band, taper relief is irrelevant because no tax is due in any event.
Use our IHT calculator to get an estimate.
Potentially Exempt Transfers (PETs)
The technical term for a gift made to an individual that is not immediately exempt and falls under the seven-year rule is a Potentially Exempt Transfer, or PET. As the name suggests, it is ‘potentially’ exempt — meaning it will become fully exempt if the donor lives long enough, but carries the risk of an IHT liability in the interim.
PETs are treated differently from gifts to trusts, which may be immediately chargeable transfers and subject to IHT at 20% at the time of the gift (on amounts above the nil-rate band). This distinction is important when considering more complex estate planning arrangements. Gifts directly to individuals — adult children, grandchildren, or friends — are generally PETs, while gifts to most types of trust are immediately chargeable.
Practical Examples and Scenarios
Abstract rules are easier to understand when applied to real situations. Here are some common scenarios that illustrate how the various exemptions work in practice.
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Gifting £3,000 Each Year to Adult Children
Janet, aged 65, wants to help her son Thomas with his living costs. She gives him £3,000 each April — the precise amount of her annual exemption. Provided she does not exceed this amount in any tax year, there are no IHT consequences whatsoever, regardless of when she dies. Over ten years, she will have transferred £30,000 to Thomas entirely free of tax — a significant sum achieved through disciplined use of a simple allowance.
Grandparents Contributing to a Wedding Gift
David and Margaret, aged 72 and 70, have a granddaughter getting married. As grandparents, each can give up to £2,500 as a wedding gift tax-free — a combined contribution of £5,000. They may also wish to use their £3,000 annual exemption on top of this (as the wedding gift exemption and annual exemption can be combined). If they had not used their annual exemption the previous year, they could each give up to £8,500 tax-free: £2,500 wedding gift + £3,000 current year + £3,000 carried forward = £8,500 per grandparent.
Giving Large Sums and the Seven-Year Rule
Richard, aged 60, decides to give his daughter £200,000 to help her buy a house. This gift exceeds his annual exemption (£3,000), so the remaining £197,000 is a Potentially Exempt Transfer. If Richard lives for more than seven years after making the gift, no IHT will be due. However, if he were to die five years later, the gift would attract IHT at a reduced rate of 24% — but only on the amount by which the gift exceeds the nil-rate band when combined with the rest of his estate. The potential saving by surviving to seven years is considerable, which is why life insurance policies written in trust (to pay any IHT that might fall due on a PET) are a common tool in estate planning.
Regular Gifts Out of Income
Eleanor, a retired consultant with a pension income of £80,000 per year, has living costs of around £40,000. She contributes £1,500 per month towards her son’s private school fees — a total of £18,000 per year. Because this is regular, documented, made out of income, and leaves her with sufficient funds for her own needs, it is likely to qualify for the normal expenditure out of income exemption. Over a decade, that is £180,000 transferred tax-free — a powerful result from a well-documented gifting strategy.
Record-Keeping and HMRC Reporting
Good record-keeping is not just good practice — it is essential for protecting your estate and your beneficiaries. HMRC can and does enquire into gifts on death, particularly where large sums are involved, and without documentation, it can be extremely difficult to prove that an exemption applied or that a gift was made from income rather than capital.
You should keep records of the following:
- The date, amount, and recipient of every significant gift
- Evidence that gifts came from income — bank statements showing regular surplus income are ideal
- Documentation of your income and expenditure to support a claim under the normal expenditure out of income exemption (HMRC form IHT403 is the relevant form used by executors)
- Confirmation that wedding gifts were made before the ceremony and that the ceremony took place
- Any written agreements, such as loan documentation if a sum was initially structured as a loan before being written off
In general, you are not required to notify HMRC of gifts during your lifetime unless they are immediately chargeable transfers (such as gifts to most trusts). However, your executors will need to report gifts made in the seven years before your death on your IHT return, so leaving them with clear records is an act of considerable kindness.
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Common Mistakes to Avoid
Even well-intentioned gifting can go wrong without proper planning and understanding. Here are the most common errors that individuals make — and how to avoid them.
Assuming All Gifts Are Automatically Tax-Free
This is arguably the most widespread misconception about gifting in the UK. Many people believe that once money leaves their bank account, it is no longer relevant for tax purposes. In reality, gifts above the exemption thresholds remain part of your estate for IHT purposes for up to seven years. A large cash gift made three years before death could leave the recipient facing a significant IHT bill.
Failing to Keep Track of the Annual Exemption
The annual exemption of £3,000 is lost forever if you fail to use it — after one year of not using it, you cannot carry it forward again. Many people simply forget to make use of their allowance, or do not realise that several smaller gifts in a year count towards the same cumulative limit. Keeping a simple spreadsheet or diary of gifts made each tax year can prevent this.
Gifting Property Without Considering Capital Gains Tax
Gifting property other than your main residence to another person is treated as a disposal for Capital Gains Tax (CGT) purposes — even though no money changes hands. If the property has increased in value since you bought it, you may have a CGT liability to settle, quite separately from any IHT considerations. This catches many people off guard, particularly those who own buy-to-let properties or have second homes.
Ignoring the Seven-Year Clock
Large gifts should ideally be made as early as possible, to maximise the chance of surviving for seven years. Waiting until later in life before making substantial gifts risks the seven-year window not closing before death. Starting a gifting strategy in your fifties or early sixties — rather than your late seventies or eighties — gives your gifts the best chance of escaping the IHT net entirely.
How to Plan Gifting Wisely
Effective gifting is not simply a matter of giving money away — it requires a degree of strategic planning, particularly where larger amounts are involved.
A few practical tips:
- Start early. The earlier you begin gifting, the longer the seven-year clock has to run, and the greater the chance of large PETs becoming fully exempt.
- Use all your exemptions every year. The annual exemption, small gifts exemption, and (where applicable) the normal expenditure out of income exemption can all work together. Do not let allowances go to waste.
- Consider life insurance. A whole-of-life insurance policy written in trust can be structured to pay the IHT that might fall due on a large PET if you die within seven years. This gives the recipient certainty and avoids them having to sell assets to meet the bill.
- Integrate gifting with your will. Lifetime gifting and testamentary planning should be co-ordinated. Your solicitor and financial planner should understand the full picture.
- Seek professional advice. For estates above the nil-rate band, or where gifts involve property, trusts, or business assets, specialist advice from a chartered tax adviser, financial planner, or solicitor experienced in estate planning is invaluable. The cost of advice is almost always outweighed by the tax savings achieved.
Frequently Asked Questions
Can I gift any amount to anyone?
In principle, yes — there is no law preventing you from giving money or assets to whoever you choose. However, the IHT rules mean that large gifts above the exemption thresholds may carry a future tax liability if you die within seven years. Subject to the exemptions described in this guide, and the seven-year rule, there is no absolute cap on gifting.
What happens if I give more than the allowance?
Any gift that exceeds the available exemptions becomes a Potentially Exempt Transfer (or, in the case of gifts to trusts, an immediately chargeable transfer). PETs become fully exempt if you survive for seven years. If you die within seven years, the gift is added back to your estate and IHT may be due — payable by the recipient of the gift, not your estate, although your estate has a secondary liability if the recipient cannot pay.
Are gifts to grandchildren treated differently?
Gifts to grandchildren are subject to the same rules as gifts to anyone else. There is no special exemption for grandchildren beyond the wedding gift allowance (£2,500 per grandparent). However, the normal annual exemption, small gifts exemption, and normal expenditure out of income exemption all apply in the usual way. Many grandparents also explore Junior ISAs or pension contributions as tax-efficient vehicles for transferring wealth to grandchildren.
Do I need to pay tax when gifting property?
Gifting property is more complex than gifting cash. While IHT rules apply in the same way (the gift will be a PET if made to an individual), there is also the potential Capital Gains Tax issue on any increase in value since you acquired the property. Your main residence benefits from Principal Private Residence relief, which may eliminate the CGT, but investment properties, holiday homes, and land do not. It is essential to take professional advice before gifting any property.
Does gifting affect my benefits or care costs?
It can. Local authorities assessing contributions towards care home fees may apply a ‘deprivation of assets’ rule if they believe assets were given away specifically to reduce care costs. There is no fixed time limit for this rule, unlike the IHT seven-year rule — meaning that gifts made many years ago could still be scrutinised if the primary purpose was to avoid care fees. The same principle can apply to means-tested benefits. This is a separate issue from IHT planning and requires its own consideration.
Conclusion
Gifting money and assets to the people you care about is one of the most rewarding things you can do with wealth. The UK’s tax rules are designed to accommodate ordinary generosity while preventing the systematic avoidance of Inheritance Tax — and with a little knowledge and planning, most people can give away far more than they realise, completely free of any tax consequence.
To recap the key tax-free allowances available in 2026: your annual exemption of £3,000 per tax year (with the option to carry one year forward); small gifts of up to £250 to any number of recipients; wedding gifts of up to £5,000 for parents, £2,500 for grandparents, and £1,000 for others; unlimited regular gifts out of income provided the qualifying conditions are met; unlimited transfers between UK-domiciled spouses and civil partners; and unlimited gifts to qualifying charities.
For parents, the most immediate action is to make use of your annual exemption every year without fail. For grandparents, combining the wedding gift exemption with your annual allowance can produce impressive results around family milestones. For those with higher incomes, the normal expenditure out of income exemption deserves serious attention — it is one of the most generous and flexible reliefs in the IHT system, yet it is consistently overlooked.
Whatever your circumstances, the most important steps are the same: plan ahead, start early, keep clear records, and seek professional advice when the amounts involved are significant. Tax law changes and personal circumstances evolve, so reviewing your gifting strategy regularly — ideally as part of an annual financial review — will ensure that your generosity achieves exactly what you intend it to, for yourself and for those who matter most to you.
