Annual Gift Allowance Explained

The annual exemption is the amount an individual can give away each tax year without those gifts being included in the value of their estate for inheritance tax purposes.

For the 2025/26 tax year, the annual exemption is £3,000 per person. This means that each individual can give away up to £3,000 in total — to one person or spread across multiple recipients — and those gifts will be immediately outside their estate for IHT purposes.

The annual exemption applies per donor, not per recipient. This means:

• A married couple can each give away £3,000 per year — a combined total of £6,000 per year — free from IHT
• The recipient can receive gifts from multiple donors, each using their own annual exemption
• The £3,000 limit is the total amount that can be given under this exemption in a single tax year, not per recipient

Gifts within the annual exemption are not subject to the seven-year rule and do not need to be declared on a Self Assessment tax return. Our article on Gifting Money to Family: UK Tax Rules and Financial Planning Considerations provides a broader overview of how gifting and inheritance tax interact.

If the annual exemption is not fully used in one tax year, the unused amount can be carried forward to the following tax year — but only for one year.

This means that if an individual did not make any gifts in the previous tax year, they can give away up to £6,000 in the current year free from IHT (£3,000 for the current year plus £3,000 carried forward).

However, the current year's allowance must be used first before the carried-forward amount can be applied. If neither year's allowance is fully used, only one year's unused allowance can be carried forward at a time.

In addition to the annual exemption, individuals can make any number of small gifts of up to £250 per recipient each tax year without those gifts being subject to inheritance tax.

The small gifts exemption applies separately from the annual exemption. Key points:

• The £250 limit applies per recipient — there is no limit on how many different people can receive small gifts
• The small gifts exemption cannot be combined with the annual exemption for the same recipient — if you give someone more than £250 but less than £3,000, the annual exemption applies, not the small gifts exemption
• Small gifts under this exemption are immediately outside the estate for IHT purposes

For example, an individual could give £250 each to ten different grandchildren, a total of £2,500, entirely free from IHT through the small gifts exemption — while still using their full £3,000 annual exemption for other gifts.

HMRC provides a separate exemption for gifts made on the occasion of a wedding or civil partnership. The amount that can be gifted free from IHT depends on the relationship between the donor and the recipient:

The gift must be made on or shortly before the wedding or civil partnership takes place, and the event must actually go ahead. If the event does not take place, the exemption no longer applies.

Wedding gifts can be made in addition to the annual exemption, meaning that a parent could potentially give a child £5,000 as a wedding gift plus £3,000 under the annual exemption in the same tax year.

Another important but less widely known exemption is the gifts from surplus income exemption. This allows individuals to make regular gifts that are immediately outside their estate for IHT purposes — with no upper cash limit — provided certain conditions are met.

To qualify, the gifts must:

• Form part of the donor's normal expenditure
• Be made out of income (not capital)
• Leave the donor with sufficient income to maintain their usual standard of living

For example, a grandparent who regularly pays monthly contributions into a grandchild's savings account, or who consistently pays school fees, may be able to rely on this exemption if the payments come from income and are part of an established pattern.

This exemption can be particularly valuable for individuals with high incomes relative to their expenditure, as it allows significant sums to be passed down over time without inheritance tax implications. Documenting the gifts and demonstrating that they come from surplus income is important if this exemption is to be relied upon.

Our article on The Seven-Year Rule for Gifts Explained (UK) covers how larger gifts are treated where exemptions do not apply.

Gifting exemptions are one component of broader estate planning and can be used alongside other strategies to manage the value of an estate over time.

Used consistently over many years, annual exemptions and regular gifts from income can meaningfully reduce the value of an estate that might otherwise be subject to inheritance tax. However, gifting decisions should take into account a person's own financial needs — it is important not to give away assets that may be needed in the future.

Larger gifts that fall outside the available exemptions will generally be subject to the seven-year rule, meaning they remain within the estate for IHT purposes for up to seven years after the gift is made.

For individuals with more complex estates, a regulated financial adviser or solicitor can help assess which combination of gifting strategies and estate planning arrangements may be appropriate.

Our article on Passing Down Wealth: Estate Planning Principles Explained explores broader wealth transfer considerations.