What is a Potentially Exempt Transfer?

A PET is a lifetime gift to an individual (or trust) that is potentially exempt from IHT if the donor survives 7 years. PETs above the annual exemption and other specific exemptions are subject to the 7-year rule.

Can I carry forward unused annual exemption?

Only by 1 year. So if you didn't use any of 2024/25's £3,000, you can use it in 2025/26 (total £6,000 immediately exempt). You cannot stockpile multiple years of unused exemption.

Are gifts between spouses PETs?

No — gifts between UK-domiciled spouses or civil partners are fully exempt with no value or time limit. Foreign-domiciled spouse exemption is capped at £325k.

Does the small gifts exemption apply per recipient or per donor?

Per recipient. You can give £250 to as many people as you wish each tax year. The total to any one person from any one donor is capped at £250 to use the small gifts exemption (you cannot give £250 + £3k AE to the same person).

How does 'normal expenditure out of income' work?

Regular gifts from surplus income are immediately exempt with no value cap, provided: (1) they are habitual/regular, (2) come from income not capital, (3) don't reduce your normal living standard. Common: monthly cash to children, school fees, regular charity beyond Gift Aid.

What if I give £4k in May and another £4k in October?

Total gifts £8k. Annual exemption (£3k current + maybe £3k carried back) = up to £6k exempt. Excess £2k is a PET. Order doesn't matter — annual exemption is allocated against earliest gifts.

Are gifts to children's trusts PETs?

Generally no — trusts (especially discretionary, accumulation & maintenance) are Chargeable Lifetime Transfers (CLTs). CLTs above NRB are immediately taxable at 20%, with top-up to 40% if donor dies within 7 years. Different from PETs.

How long should I keep records of gifts?

At least 7 years from the date of each gift. Executors need this evidence to file IHT400 correctly. Keep a gift diary showing date, recipient, amount, and exemption claimed.

Potentially Exempt Transfer Calculator UK 2025/26

Annual exemption mechanics in 2025/26

The UK annual exemption for inheritance tax is £3,000 per donor per tax year (6 April – 5 April). Key features:

Per donor, not per recipient — you can give one person £3,000 or split it across multiple recipients, but the total per donor is capped.
Carry-back of one year only — if you didn't use last year's £3,000, you can use it this year (so up to £6,000 in a fresh-start year). You cannot stockpile multiple years.
Used in chronological order — current year's exemption used first, then any carried back. So if you give £4,000 in 2025/26 and used £0 in 2024/25, the £4k is treated as £3k current + £1k carried back.
Couples — each spouse has their own £3k. So a couple can jointly gift £6k/year (or up to £12k in fresh-start years) without consuming any other allowance.

The £3,000 has been frozen at this level since 1981. Real-terms erosion has made it nominally trivial — adjusted for inflation, the equivalent today would be about £14,000. Government has consulted on raising it but no action as of May 2026.

Other gift exemptions before PET status applies

Several gifts are exempt without becoming PETs:

Small gifts (£250 per recipient) — unlimited recipients per year. Cannot combine with annual exemption to same recipient.
Wedding gifts — by relationship: parent £5,000, grandparent £2,500, party to marriage £2,500, anyone else £1,000. Per recipient per wedding.
Normal expenditure out of income — regular gifts from surplus income (must be habitual, not reduce living standards). Common: monthly cash to children, paying grandchild school fees, regular gifts to charity beyond Gift Aid.
Spouse/civil partner gifts — unlimited (UK-domiciled). Foreign-domiciled spouse exemption capped (currently £325k).
Charity, political party, national heritage gifts — fully exempt regardless of size.

Gifts that exceed these exemptions become PETs. PETs only attract IHT if the donor dies within 7 years; otherwise they are fully exempt at year 7.

For estate planning, the key strategy is using all available exemptions every year (potentially £6k per couple per year + £250 × n grandchildren + wedding gifts as they occur + regular school fee payments under normal expenditure) so that PETs are minimised.

Three worked examples (UK 2025/26)

Example 1: £8,000 gift in fresh-start year (no prior gifts)

Eleanor gives £8,000 to her daughter in May 2025. Her 2024/25 annual exemption was unused.

Analysis: Annual exemption used: £3,000 (current year) + £3,000 (carried back) = £6,000. PET portion: £8,000 − £6,000 = £2,000. The £2,000 is a PET — subject to 7-year rule. The £6,000 is immediately exempt.

Example 2: £250 per recipient — 10 grandchildren

Albert gives £250 to each of his 10 grandchildren = £2,500 total.

Analysis: All gifts within £250 small-gifts exemption. None are PETs. Annual exemption £3,000 still fully available for other gifts. No 7-year rule application.

Example 3: Wedding gift £5k from grandparent

Mary gives £5,000 to her grandson on his wedding day.

Analysis: Wedding gift exemption for grandparent = £2,500. Excess £2,500 is treated as a PET (subject to 7-year rule). If she also wants to use her £3,000 annual exemption, she can combine: £2,500 wedding + £2,500 annual exemption = £5,000 fully exempt; PET of £0.

Common mistakes to avoid

Combining annual exemption + small gifts (£250) to same recipient — they are mutually exclusive.
Forgetting carry-back — many parents miss £3,000 of exemption from prior year.
Treating a gift to a UK-domiciled spouse as a PET — it's fully exempt.
Confusing PETs with Chargeable Lifetime Transfers — gifts to trusts are usually CLTs, not PETs.
Believing wedding gifts can be combined across donors — exemption is per donor per couple.
Not establishing 'normal expenditure out of income' properly — must show regularity and surplus.
Letting the annual exemption pile up unused — only one year can be carried back.

When to use this calculator

Use this calculator at the start of each tax year to plan your full annual exemption usage, before any large gift, after weddings or significant family events, and as part of any IHT mitigation strategy. Couples should track exemptions jointly. Track gifts in a written register kept with your will — executors will need 7 years of records.

Regional differences (Scotland, Wales, Northern Ireland)

UK Inheritance Tax is UK-wide with identical £325,000 nil-rate band, £175,000 residence nil-rate band, 40% rate (36% if 10%+ to charity), and 7-year gift rules across England, Wales, Scotland, and Northern Ireland. Devolution does not affect IHT. The exception is some Scottish-specific terminology (e.g. "executor-dative" instead of "personal representative"), but the substantive tax rules are uniform. Crown Dependencies (Isle of Man, Jersey, Guernsey) have their own (much lower or zero) IHT regimes.

Potentially Exempt Transfer Calculator — UK 2025/26