Annual Gift Allowances and Exemptions
How to use annual exemptions effectively to reduce your inheritance tax liability
At-a-glance
- • Annual exemption: £3,000 total (1-year carry-forward)
- • Small gifts: £250 per person (not combinable with other allowances for the same person that year)
- • Wedding gifts: £5,000 child / £2,500 grandchild or great-grandchild / £1,000 others (can combine with the annual exemption)
- • Gifts out of income: regular, from income, no reduction in lifestyle (keep records)
Annual exemption (£3,000 total per tax year)
You have a total of £3,000 each tax year. You may give it all to one person or split it across several people. If unused, you can carry it forward for 1 tax year only (then use the current year's allowance first).
Per person, per tax year. You can give this amount to anyone without inheritance tax implications. Unused allowance can be carried forward for one year only.
Combined annual exemption for married couples or civil partners. Each person has their own £3,000 allowance that can be used independently.
Small gifts (£250 per person)
You may give any number of gifts up to £250 per person in a tax year.
Important: You cannot use the £250 allowance for anyone who also receives another allowance from you in the same tax year (e.g., your £3,000 annual exemption or a wedding gift allowance).
Wedding and Civil Partnership Gifts
Special exemptions apply for wedding and civil partnership gifts, with the amount depending on your relationship to the couple.
Per child getting married or entering a civil partnership
Per grandchild or great-grandchild getting married
For anyone else getting married (friends, other relatives)
You can combine a wedding/civil partnership gift with your £3,000 annual exemption (where needed), but not with the £250 small gifts allowance for the same recipient in the same tax year.
Example: You can give your child £5,000 as a wedding gift plus use your £3,000 annual exemption in the same tax year (total £8,000 exempt).
Gifts out of income — potential full exemption
Regular gifts can be exempt if they are:
- • Regular/typical for you (a pattern over time),
- • Paid out of income (not capital), and
- • Leave you with enough income to maintain your usual standard of living.
Record-keeping: Keep a simple multi-year income vs expenditure summary and evidence of payment dates/amounts/recipients.
Other Important Exemptions
Unlimited gifts between UK-domiciled spouses and civil partners.
Domicile note: Gifts to a UK-domiciled spouse/civil partner are generally exempt. If your spouse/civil partner is not UK-domiciled, the exemption is restricted (broadly up to the nil rate band unless an election is made).
Unlimited gifts to UK registered charities. Plus, if you leave 10% or more of your estate to charity, the inheritance tax rate reduces from 40% to 36%.
If you continue to benefit from an asset you have given away (e.g., you gift a home but keep living there without paying market rent), HMRC may treat it as a gift with reservation and pull the value back into your estate on death.
Strategic Use of Exemptions
To maximize the effectiveness of gift exemptions, consider these strategies:
1. Use Annual Exemptions Early
Make gifts early in the tax year (April) to maximize the time before potential inheritance tax liability. Remember unused allowance can only be carried forward for one year.
2. Combine Exemptions Strategically
You can use your annual exemption (£3,000) for one person and small gifts allowance (£250) for others, but not both for the same person in the same tax year.
3. Plan Around Life Events
Wedding gifts don't count towards annual exemptions, so you can give both a wedding gift and use your annual exemption for the same person.
4. Document Regular Gifts
Keep detailed records of regular gifts from surplus income, including bank statements and income records to prove the pattern and affordability.
Report gifts and exemptions on IHT403 with the main IHT400 where required. Keep dated records of amounts, recipients, and which allowance you used.
Common Mistakes to Avoid
- • Don't assume all gifts are exempt - only specific exemptions apply
- • Small gifts allowance cannot be combined with other exemptions for the same person
- • Annual exemption unused allowance expires after one year - use it or lose it
- • Regular gifts from income must truly be from surplus, not capital
- • Keep detailed records of all gifts and exemptions claimed