Calculate how gifts reduce your inheritance tax estate. Use annual exemptions, small gifts allowance, and the 7-year rule to pass wealth tax-efficiently to family.
Inheritance tax is charged at 40% on the value of an estate above the nil-rate band (£325,000). If the main residence is left to direct descendants, an additional residence nil-rate band of £175,000 applies, giving a combined threshold of £500,000 per person (£1,000,000 for a married couple using both thresholds).
| Gift Type | Annual Limit | IHT Treatment |
|---|---|---|
| Annual exemption | £3,000 per donor | Immediately exempt |
| Carry forward (1 year) | +£3,000 (if unused) | Immediately exempt |
| Small gifts allowance | £250 per recipient | Immediately exempt |
| Wedding gift (to child) | £5,000 | Immediately exempt |
| Wedding gift (to grandchild) | £2,500 | Immediately exempt |
| Wedding gift (to anyone) | £1,000 | Immediately exempt |
| Gifts to spouse/civil partner | Unlimited (UK domiciled) | Fully exempt |
| Gifts to charity | Unlimited | Fully exempt |
| Potentially Exempt Transfers (PETs) | Unlimited | Exempt if donor survives 7 years |
You can give away up to £3,000 per tax year completely free of IHT (the annual exemption). If you did not use last year's allowance, you can carry it forward once, giving £6,000 in one year. Additionally, you can give up to £250 to any number of individuals per year (small gifts allowance), and regular gifts from surplus income are also exempt.
The IHT annual exemption for 2026/27 remains at £3,000 per person. This has been frozen at this level since 1981. You can carry forward one unused year, so a couple who have not used last year's exemption could give away £12,000 this year IHT-free (£6,000 each).
Gifts above exempt amounts are called Potentially Exempt Transfers (PETs). If the donor survives 7 years after making the gift, it falls completely outside the estate for IHT purposes. If they die within 7 years, taper relief applies: 3–4 years = 20% reduction in IHT, 4–5 years = 40%, 5–6 years = 60%, 6–7 years = 80%. Full 40% IHT applies if death occurs within 3 years.
Potentially Exempt Transfers (PETs) are gifts made by an individual that are not covered by an IHT exemption. They are 'potentially' exempt because they become fully exempt from IHT if the donor survives 7 years from the date of the gift. PETs include gifts of cash, property, and other assets to individuals (not to trusts, which are treated differently).
Gifts between spouses and civil partners are completely exempt from IHT, with no limit, provided both are UK domiciled. Additionally, unused nil-rate band (currently £325,000) can be transferred to a surviving spouse, potentially doubling the threshold to £650,000 — plus any unused residence nil-rate band (up to £175,000 each = £350,000 total for a couple).