Gifts made during your lifetime can sometimes affect the amount of Inheritance Tax that your estate pays on your death.
However, with careful use of Potentially Exempt Transfers and various lifetime gift exemptions, you can reduce or eliminate any IHT on those gifts. Below we outline how lifetime gifting works for IHT purposes, including updated rules and new changes on the horizon.
Potentially Exempt Transfers (PETs)
Most outright gifts to individuals that aren’t covered by a specific exemption are classed as “Potentially Exempt Transfers”. A PET has no IHT charge at the time of the gift – and there’s no need to report it to HMRC when made. If you survive 7 years after making the gift, it drops out of your estate entirely for IHT purposes. If you die within 7 years, however, the gift “fails” and becomes chargeable: your personal representatives (PRs) will need to include it in the IHT calculation on death, alongside the rest of your estate.
When a PET fails, it uses up part of your nil-rate band (the £325,000 threshold) before the rest of the estate. Any IHT due on the gifts is usually paid by the estate, but if you gave away more than the nil-rate band in those 7 years, the recipients of the gifts may have to pay the tax on their gifts (gov.uk).
Taper Relief:
If death occurs 3 to 7 years after the gift, the IHT rate on that gift is reduced on a sliding scale (known as taper relief).
The tax on the gift is 40% if you die within 3 years, then reduced to 32% for gifts 3–4 years before death, 24% for 4–5 years, 16% for 5–6 years, and 8% for 6–7 years. (Taper relief applies only if the total value of gifts in the 7-year period exceeds the nil-rate band – it reduces the tax on the gift, not the value of the gift itself.) This means that after 7 years the gift is completely free of IHT, and even gifts in the 3–7 year window can benefit from a lower tax rate if the nil-rate band has been exceeded.
Lifetime gift exemptions
Certain exemptions and allowances (set out in the Inheritance Tax Act 1984, sections 18–22) allow you to make IHT-free gifts during your lifetime. Where an exemption applies, the gift is not a PET at all – it has no impact on your estate for IHT and no reporting is required. Key lifetime gift exemptions include:
Gifts to a spouse or civil partner
Unlimited gifts to your spouse or civil partner are exempt, provided the recipient spouse is a UK long-term resident (LTR). (Since April 2025, IHT uses a residence-based test – broadly 10 out of the last 20 tax years – instead of domicile status for spousal transfers.) If your spouse/civil partner is not UK-domiciled or not a long-term UK resident, the spouse exemption is capped at the nil-rate band (currently £325,000) – any amount above that cap is treated as a PET. However, a non-UK resident spouse can elect to be treated as UK resident for IHT, allowing the full unlimited spouse exemption to apply (at the cost of bringing their worldwide assets into the UK IHT net) (gov.uk). (Note: Transfers between two non-UK-domiciled/non-LTR spouses, or from a non-LTR donor to an LTR spouse, are generally fully exempt as well, since the donor’s estate would only be within UK scope on UK assets in those cases.)
Gifts to charity and political parties
Any amount gifted to UK-registered charities is exempt from IHT. Likewise, gifts to a qualifying political party are IHT-exempt (gov.uk). A political party qualifies for this exemption if, at the last general election prior to the gift, the party had either at least two MPs elected to the House of Commons, or one MP elected and at least 150,000 votes cast for its candidates. (This condition ensures only significant parties benefit from the exemption.)
Small gifts exemption (£250)
You can give up to £250 per person per tax year to as many people as you like, and these small gifts are completely exempt. There is no limit on the number of recipients. The only rule is that you cannot combine the £250 small-gift allowance with any other exemption for the same person in the same year (gov.uk). (In other words, if you gave someone £3,000 using your annual exemption, you can’t claim an additional £250 exemption for that person in that year.)
Annual £3,000 exemption
Every tax year, you have a £3,000 annual gift allowance that you can give away free of IHT. This £3,000 can go to one person or be split among several gifts totaling that amount (gov.uk). Importantly, if you don’t use your £3,000 exemption in one tax year, you can carry it forward one year (it can only be carried forward once). This means you could gift up to £6,000 in the next year by using two years’ allowances.
Example: Steven and Lee did not use any annual exemption in the 2019/20 tax year. In February 2021, each of them gave £6,000 to their son, Oliver (a total of £12,000 between them). These gifts are entirely exempt: each parent’s £3,000 allowance for 2020/21 covers half of their gift, and each brought forward an unused £3,000 from 2019/20 to cover the remainder.
Wedding or civil partnership gifts
Gifts made on the occasion of a marriage or civil partnership can be exempt up to certain limits, per donor and per marriage. You can give up to £5,000 to your own child for their wedding, up to £2,500 to a grandchild or great-grandchild (or to your own parent’s wedding), and up to £1,000 to anyone else (for example, a friend or more distant relative) as a wedding/civil partnership gift (gov.uk).
To qualify, the gift must be made before the wedding (or civil partnership ceremony) and in contemplation of the marriage. (These wedding gift allowances can be combined with other exemptions for a different purpose – for instance, you could give your child a £5,000 wedding gift and also use your £3,000 annual exemption for an additional gift in the same yeargov.uk. The only exception is you can’t combine a wedding gift exemption with the £250 small-gift allowance for the same recipient.)
Normal expenditure out of income
The “normal expenditure out of income” exemption (IHTA 1984, Section 21) is an incredibly valuable but often under-used provision. It allows you to make unlimited gifts, of any amount, completely free of IHT immediately – provided that all three of the following conditions are met (gov.uk):
- Part of normal expenditure: The gift forms part of your normal expenditure – i.e. it is made as a regular payment or is in line with your habitual spending pattern. (What is “normal” can vary from person to person. There is no strict rule for how many times or how long you need to make a gift for it to count as normal – even a single gift can qualify if you can show you intended it to be the first of a series of regular gifts.)
- Made out of income: The gifts are made out of your income (after-tax income), not out of your capital. In practice, that means you should have sufficient income sources (salary, investment income, pension, etc.) such that the gifts are funded from income received, taking one year with another, rather than by dipping into your savings or selling assets.
- No drop in standard of living: After making the gifts, you retain enough income to maintain your usual standard of living. In other words, the gifting should truly be from surplus income – it should not cause you to sacrifice your normal lifestyle or resort to using capital to meet your living expenses.
Gifts that meet these three criteria are exempt transfers – they don’t count toward the nil-rate band at all and are not subject to the 7-year rule. There is no upper limit on the value of gifts that can be covered by this exemption, as long as you fulfill the conditions.
This is a powerful planning tool: for example, individuals with high incomes can potentially pass on very large amounts over time by making regular surplus-income gifts, without any IHT cost to their estate. (It effectively lets you give away excess income each year and have it immediately outside your estate for IHT.)
It’s worth noting that the exemption can apply to gifts to individuals or into trusts – unlike a PET (which only covers individual outright gifts), a gift into a trust can qualify for the normal expenditure exemption if the conditions are met.
Record-keeping:
It is essential to keep good records of these gifts and your finances to demonstrate that each gift satisfied the above conditions. HMRC may require evidence, after your death, of your intent and ability to make the gifts as part of your normal outgoings.
Records might include a written statement of your intention to make regular gifts (especially if you only managed to make one or two before death), schedules of your income and expenditure for each year, and notes of the gifts made. In a noted case (Bennett v IRC [1995] STC 54), the court accepted that even a one-off payment could qualify as “normal” if there was a firm intention to continue a pattern of gifts, supported by evidence. So documenting your intentions and the regular nature of your gifts is very important for your executors to be able to claim this exemption.
The practical effect of this exemption is that those with high levels of disposable income can transfer substantial wealth free of IHT, completely outside the usual £325,000 nil-rate band limitation. For instance, someone with a significant surplus income each year could gift (or settle into a trust) tens of thousands of pounds annually under this exemption, without eroding their nil-rate band or incurring any 20% lifetime tax charge.
Gifts out of income into trust
It’s worth mentioning that normally, a gift into a discretionary trust is a Chargeable Lifetime Transfer (CLT) that would immediately be subject to an IHT entry charge of 20% on the amount above the nil-rate band (gov.uk).
However, if such a transfer into trust qualifies as normal expenditure out of income, it is entirely exempt – no 20% charge and no reporting as a chargeable transfer. In other words, the exemption can be used to fund gifts either outright to individuals or into trusts that would otherwise be taxable. (This can even include using surplus income to pay premiums on life insurance policies in trust – for example, paying premiums on a policy written in trust for your children or grandchildren can be treated as normal expenditure gifts. Upon your death, the policy proceeds in trust could then be used to cover any IHT due, effectively outside your estate.)
Reporting requirements:
Normally, when you make a chargeable gift into a trust, you have to submit an IHT100 account to HMRC, unless the gift is within available nil-rate band and certain conditions are met. There are “excepted transfer” rules that spare you from reporting some smaller CLTs. In general, if the value of a CLT (plus any other CLTs in the previous 7 years) does not exceed the nil-rate band (or 80% of the nil-rate band for gifts of assets other than cash or quoted stocks), it can be an excepted transfer that does not require an IHT100 form.
So, many modest gifts into trust won’t need reporting at all. But even if an IHT100 is needed, qualifying for the normal expenditure exemption means no IHT is payable on the transfer – you would just indicate on the form that the gift is exempt under the normal expenditure rule, and provide evidence if requested. (If the exemption fully covers the gift, it also doesn’t use up any of your nil-rate band.) Always ensure you document the exemption conditions, since HMRC will review them if a claim is made by your PRs after death.
Gifts for family maintenance (living costs)
Another often-overlooked exemption covers certain gifts made for the maintenance of family members. Under IHT law, any reasonable provision you make for the living costs of specific relatives is not a transfer of value (meaning it’s outside the scope of IHT). This includes:
- Spouse or ex-spouse maintenance: payments to maintain your spouse or civil partner (or former spouse/civil partner).
- Child maintenance: payments for the maintenance, education or training of your children (this covers children under 18, or older children still in full-time education or training). For example, you could pay for your minor child’s school fees or university living costs, and it would be exempt from IHT. (If the support is via a trust, the trust must not permit benefits to the child beyond age 18 or end of education for the full exemption to apply.)
- Dependent relatives: payments for the care or maintenance of a dependent relative (this typically means an elderly or infirm relative who is dependent on you due to old age or disability).
These maintenance gifts are outright IHT-exempt – they aren’t limited in amount (beyond needing to be “reasonable” for the person’s needs) and they don’t require the donor to meet the normal expenditure test. In fact, there is no need to show that your own standard of living is unaffected by these payments.
For instance, even if you have to use capital to help support an elderly dependent parent, those payments can qualify as exempt if they are reasonable for the parent’s care or maintenance. This exemption can be quite valuable, essentially allowing you to take care of your family members’ living expenses without any IHT cost, separate from the surplus income exemption discussed above.
To note: The maintenance exemption and the normal expenditure (surplus income) exemption can sometimes overlap – for example, regular payments to support a child might meet both sets of criteria.
In practice, it’s good to claim whichever exemption is most clearly applicable. Unlike the normal expenditure exemption, the maintenance exemption is a specific statutory carve-out that doesn’t require the pattern or record-keeping of the surplus income rule. It’s designed to ensure that taking care of your family’s basic needs doesn’t trigger an IHT liability.
New and upcoming changes to be aware of
Inheritance Tax rules have seen some recent reforms and upcoming changes which could affect lifetime gifts and estate planning:
Business and Agricultural Property Relief – new £1 million Cap (from April 2026)
Business Property Relief (BPR) and Agricultural Property Relief (APR) currently can reduce the value of qualifying business or farm assets by 100% (or 50% in some cases) for IHT purposes. However, from 6 April 2026 significant reforms will impose a £1 million allowance on these reliefs.
The 100% relief will apply only up to £1 million of combined qualifying agricultural and business property value; any excess value above £1 million will only qualify for relief at 50%. In practice, this means each individual will have a £1 million lifetime cap on full BPR/APR – above that cap, half of the remaining value becomes chargeable to IHT (effectively an IHT rate of 20% on the excess, instead of 0% previously).
Some key points about this reform:
- The £1 million limit applies to the combined value of all property that would normally be eligible for 100% BPR or APR. This includes qualifying assets given as lifetime PETs or CLTs in the 7 years before death, assets passed on death, etc. The cap will therefore affect lifetime transfers (gifts) and assets in the death estate, cumulatively. After you have used the £1 million 100%-relief allowance, any further gifts or estates comprising qualifying business/farm assets will only get 50% relief.
- There will actually be two separate £1 million allowances: one for individuals (covering assets you gift or leave in your estate) and one for trusts (covering assets held in relevant property trusts for each 10-year anniversary or exit charge). This means trustees of discretionary trusts also get a £1 million 100%-relief allowance at each charge, independent of the settlor’s personal allowance.
- Spouses will EACH have a £1 million allowance, but it is NOT transferable if it goes unused on the first death. This is an obvious estate planning opportunity.
- Certain investments that previously qualified for 100% BPR will be restricted to 50%. For example, shares traded on the AIM market (which is not a full stock exchange) will only get 50% relief going forward. Some unlisted shares that currently get 100% may also be limited if they are listed on foreign exchanges that are not “recognised stock exchanges” by HMRC. Privately owned company shares (truly unquoted shares) will still be eligible for 100% relief (up to the £1m cap). Notably, the existing rules where certain assets only qualified for 50% relief (e.g. controlling shareholdings in quoted companies, or assets like furnished holiday lets in a business) remain at 50% – those aren’t changed. The reform mainly introduces the cap and reduces relief for some classes of shares.
- The £1 million cap for an individual refreshes every 7 years (similar to the nil-rate band), so it effectively applies per 7-year cycle of transfers. For example, if you made significant lifetime transfers of business assets, after 7 years those would no longer count against a new £1 million allowance for subsequent gifts or your estate. For trusts, the £1 million resets every 10 years for the periodic charges. Again, this is an obvious estate planning opportunity.
If you have a business or farm, you may want to review any planned gifts or succession plans in light of the cap.
You can read more about planning strategies in my article on Business Property Relief.
Pensions to be included in estate value (from April 2027)
Traditionally, unused pension funds (in defined-contribution pensions) and certain pension death benefits have been outside the scope of IHT, especially when paid at trustees’ discretion. This has allowed some people to use pensions as a way to pass wealth IHT-free. The rules are changing: from 6 April 2027, most unused pension funds and lump-sum death benefits will be treated as part of the deceased’s estate for IHT purposesgov.uk. In other words, if you die with remaining pension assets (for example, in a drawdown fund) or with a lump-sum death benefit payable from your pension, those amounts will count towards your estate value and could be subject to IHT (at 40% above the nil-rate band).
Key points of this reform:
- It applies primarily to defined contribution (money purchase) pension pots. Many people have been leaving their pension pots untouched (where possible) to avoid IHT, since under current rules those funds can go to beneficiaries tax-free (if you die before 75) or with only income tax implications for the beneficiary. From 2027, that advantage is largely removed: except for some excluded categories (below), the value in your pension when you die will be aggregated with your other assets for IHT.
- Who pays the tax? It will be the deceased’s personal representatives who are responsible for reporting and paying any IHT due on pension assets. In practice, this means your executors will need to include pension values on the IHT return and settle any tax (using estate assets or perhaps the pension benefits themselves). Scheme administrators won’t deduct IHT at source; instead, they’ll provide information to the executors.
- Exceptions: Death-in-service benefits from registered pension schemes (typically lump sums from employment-based schemes if you die while still working) will remain outside IHT. Also, pensions that are non-discretionary (where benefits are payable as of right to a specific person) were generally already in the estate and will continue as such. The big change affects the discretionary-type pension arrangements which currently bypass IHT. Dependants’ scheme pensions (e.g. a survivor’s pension from a defined benefit scheme) are also excluded from the new charge.
- If you have a large pension fund that you were planning to use as a tax-free inheritance for your family, you’ll need to reconsider that strategy. For deaths after April 2027, that fund could face a 40% hit (to the extent your estate including the pension exceeds the nil-rate band and any other allowances). You might want to take advice on possibly using some of your pension differently (for example, withdrawing more to use in your lifetime or gifting, noting that income tax implications need to be weighed as well), or looking at life insurance to cover the IHT, etc.
- This change is planned to take effect for pension member deaths on or after 6 April 2027.
- If you placed business property within your pension, you may also want to consider reviewing your strategy since it will not be eligible for Business Property Relief under the forthcoming changes.
Jennifer Wiss-Carline is a practising Solicitor regulated by the SRA and a Chartered Legal Executive (FCILEx), bringing over two decades of experience to her practice. Specialising primarily in Private Client law, Jennifer expertly handles matters including Wills, Inheritance Tax and Estate planning, Lasting Powers of Attorney for individuals and businesses, Deputyship Orders and more.
