Inheritance tax gifting rules in the UK: what you need to know
Many people give money or property to children, grandchildren or a spouse during their lifetime. When dealing with probate, however, it is essential to understand how those gifts are treated for Inheritance Tax (IHT). The rules are specific, and getting them wrong can be costly for the estate.
A gift is anything of value that leaves a person’s estate without full payment in return. Money, property, personal possessions and the transfer of legal rights can all count as gifts. HM Revenue & Customs (HMRC) examines certain gifts made during the seven years before death when calculating IHT, because those transfers may still attract tax.
Which gifts are exempt from inheritance tax?
Some gifts fall outside the scope of IHT entirely, regardless of when they are made. The main categories are as follows.
- Annual exemption. Each person may give away up to £3,000 in total each tax year. Any unused portion can be carried forward to the following tax year, but for one year only.
- Small gifts. You may give up to £250 per recipient in the same tax year, provided you have not used another allowance for that person.
- Gifts on marriage or civil partnership. The limits are £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
- Regular gifts from surplus income. These must be regular, come from income rather than savings, and must not reduce your standard of living. There is no upper limit, but careful record-keeping is essential.
That last exemption deserves a word of warning, because it is the one most often lost. Your executors will have to prove it after you have died, using a schedule on HMRC’s form IHT403. They will need a year-by-year record of your income, your normal spending and the gifts you made. Keep a simple annual note while you are alive, with a letter setting out what you intend to do and why. Without that evidence, HMRC often refuses the claim, however genuine the gifts were.
- Gifts to charity. Any gift to a UK-registered charity or qualifying political party is completely exempt. Gifts to certain national institutions are also exempt.
- Gifts between spouses and civil partners. These are normally free of inheritance tax with no upper limit.
One condition applies to that last point, and it changed recently. The old test asked whether the recipient was domiciled in the UK. Since 6 April 2025 it asks whether they are a long-term UK resident, which broadly means UK resident for at least 10 of the previous 20 tax years.
If the person giving is a long-term UK resident but their spouse or civil partner is not, the exemption is limited to £325,000 in total, less any earlier transfers that used the limit. Anything above that may be taxed. The receiving spouse or civil partner can elect to be treated as a long-term resident to unlock the full exemption. However, that brings their worldwide assets into UK inheritance tax, so it needs advice.
A note on gifts with reservation
A gift only works for IHT if you genuinely give it away. Giving your home to a child but continuing to live there rent-free is a “gift with reservation”, and HMRC treats it as still in your estate at death. To avoid this, pay full market rent or do not make the gift.
There is one exception worth knowing. If you give away a share of your home and then carry on living there with the person you gave it to, the rules may not apply. You must both genuinely share the property, and you must both pay your fair share of the running costs. It is a narrow exception, so check it before relying on it.
Potentially exempt transfers and the seven-year rule
Most outright gifts to individuals that do not fall within an exemption are known as Potentially Exempt Transfers (PETs). If a larger gift to an individual exceeds your annual exemption of £3,000, it is treated as a Potentially Exempt Transfer. PETs become fully exempt from inheritance tax if you survive for seven years after making the gift, which is commonly known as the seven-year rule.
Certain gifts, including those into a discretionary trust or to a company, are considered Chargeable Lifetime Transfers (CLTs) and are subject to a different set of rules.
If the donor dies within seven years, the gift becomes chargeable in its own right. It is not simply added to the estate. Instead, it uses up the nil rate band first, before anything the person still owned at death. The nil rate band for 2026/27 is £325,000 per person, and it is confirmed frozen until at least April 2031.
Married couples and civil partners get more than that between them. Any unused percentage of one partner’s nil rate band can be transferred to the survivor’s estate if it is claimed, so a couple can have up to £650,000 of nil rate band, before any residence allowance is counted.
Who actually pays the tax on a failed gift?
This surprises almost everyone, so it is worth stating plainly. The tax on a gift that fails is not the estate’s bill first. It belongs to the person who received the gift.
The recipient must pay any tax due within six months after the end of the month of death. If it remains unpaid 12 months after the end of that month, HMRC can also look to the personal representatives. So if you are administering an estate, tell anyone who received a large gift about any potential liability, and tell them early.
How HMRC orders gifts against the nil rate band
HMRC allocates the nil rate band to transfers in chronological order, so the oldest transfer uses the nil rate band first. If lifetime transfers use up the full nil rate band, no nil rate band remains for the estate, although other allowances, exemptions and reliefs may still apply.
This matters in practice. Say your lifetime gifts within seven years of death come to £200,000. No tax is due on the gifts themselves. However, they use up £200,000 of your nil rate band, leaving only £125,000 to set against everything else you owned. Any part of the estate above the remaining nil rate band is normally taxed at 40%, after any other available allowances, exemptions and reliefs.
How taper relief works on inheritance tax gifts
A PET that becomes chargeable because the donor dies within seven years may qualify for taper relief. It is worth understanding exactly what taper relief does, and does not, do.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer. In addition, taper relief only applies once your chargeable lifetime gifts in the seven years before death exceed the £325,000 nil rate band. Below that figure it does nothing at all, because there is no tax for it to reduce.
Where taper relief does apply, the rates for 2026/27 are as follows (the percentages have not changed):
| Years between gift and death | Effective rate of tax on the gift |
|---|---|
| 0 to 3 years | 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% |
We look at this in more detail in our article on inheritance tax taper relief.
What has changed in 2026?
The everyday gifting exemptions described above remain unchanged. However, two broader IHT reforms are worth noting. From 6 April 2026, 100% business and agricultural property relief is capped at £2.5 million per person, with 50% relief above that. Separately, most unused pension funds and pension death benefits are due to enter the scope of IHT from 6 April 2027, subject to specific exclusions. If either of these changes affects the estate you are administering, seek professional advice promptly.
That allowance can also pass between spouses and civil partners, so a couple may have up to £5 million of it between them. Shares listed on markets such as AIM now get 50% relief rather than 100%, and that does not use up the allowance.
Find a probate professional through The Probate Network
Dealing with inheritance tax alongside the rest of the probate process can be complex. The Probate Network connects you with fully regulated solicitors and estate practitioners who can advise clearly on gifts, exemptions and your responsibilities as an executor. Book a free consultation today.
Frequently asked questions
What is the annual gift allowance for inheritance tax in 2026/27?
Each individual in the UK has an annual gift allowance of £3,000, meaning you can gift up to this amount each tax year without the gift using your IHT nil rate band. If you do not use your full annual exemption in one tax year, you are able to carry it forward to the following tax year. The carry-forward applies for one year only, so unused allowance from earlier years is lost.
Does taper relief reduce the value of a gift for IHT purposes?
No. Taper relief reduces the amount of IHT payable, not the value of the gift itself. Chargeable lifetime transfers made in the seven years before death are cumulated against the nil rate band at their full value, regardless of how many years ago they were made. Taper relief only affects the tax rate on any amount that exceeds the nil rate band.
What happens if I give away my home but continue to live in it?
Giving your home to a child but continuing to live there rent-free is a “gift with reservation.” HMRC treats it as still in your estate at death. The gift therefore provides no IHT advantage. To avoid this outcome, you would need to pay a full market rent to the new owner.
Are gifts to a spouse or civil partner subject to inheritance tax?
Gifts between spouses or civil partners are normally exempt from inheritance tax. The exemption is unlimited unless the donor is a long-term UK resident and the recipient is not. In that case, the exemption is limited to £325,000 in total, less any earlier transfers that used the limit. The recipient may elect to be treated as a long-term UK resident; a solicitor can advise on the consequences for your specific situation.
This article is for general guidance only and does not constitute legal, tax or financial advice. Rules and thresholds can change and every estate is different. For advice on your own circumstances, speak to a qualified professional. You can book a free legal consultation through The Probate Network.
