The everyday gifts that inheritance tax leaves alone from the start

Most families never think about tax when a grandparent hands over a birthday present or pays for a school trip, and for most everyday gifts there is no reason to. Inheritance tax only becomes relevant when an estate is large enough, and even then the law sets aside several kinds of gift that are exempt from the start.

Those exemptions are worth knowing for two reasons. They let people help family during their lifetime with confidence, and they save executors time later, because exempt gifts do not need to be weighed up in the way larger gifts do.

Why everyday gifts are treated differently

Inheritance tax is charged on an estate above the nil-rate band, which is £325,000 and is set to stay at that level until 5 April 2031. Larger gifts made in the seven years before death can be counted back into the estate. That rule gets most of the attention, but it is not the subject here.

This article is about the gifts that never enter that calculation at all. GOV.UK lists them, and HMRC’s inheritance tax manual sets out the detail. Each exemption has its own limit and conditions, and some can be combined.

The £3,000 annual exemption

Each person can give away £3,000 in total in each tax year without it counting towards their estate. It can go to one person or be split between several. If you do not use all of it, the unused part can be carried forward, but only for one tax year. So someone who gave nothing last year could give up to £6,000 this year under the exemption, after which the carried-forward amount is used up.

Because each person has their own exemption, a couple can give up to £6,000 between them in a year, or £12,000 if neither used their allowance the year before.

Small gifts of up to £250

You can give up to £250 to as many different people as you like in a tax year. Birthday and Christmas money for grandchildren, nephews and godchildren usually falls here. The condition is that you have not used another exemption on the same person. If you give a grandchild £400, the small gifts exemption does not cover the first £250; the whole £400 would need to come under the annual exemption or another one instead.

Wedding and civil partnership gifts

Gifts made on the occasion of a wedding or civil partnership have their own limits, depending on the relationship:

So a parent who has not used this year’s annual exemption could give a child £8,000 towards their wedding without inheritance tax, made up of £5,000 under the wedding exemption and £3,000 under the annual exemption. The gift needs to be made on or shortly before the wedding, and the wedding has to go ahead.

Regular gifts out of income

This exemption is the least known and potentially the most useful. Gifts are exempt with no set limit if, in HMRC’s words, they form part of your normal expenditure, are made out of income and leave you with enough income to keep up your normal standard of living. All three conditions must be met.

In practice that means a pattern: paying a grandchild’s music lessons each month, contributing to a child’s rent, or paying into a savings account for a child under 18. The money must come from income such as a pension or earnings, not from savings or the sale of assets, and you should be able to afford it without cutting back on your own day-to-day life.

Keep a simple record

GOV.UK advises keeping a record of gifts: what you gave, its value and the date. For regular gifts from income it also helps to note your annual income and spending. Executors use form IHT403 to report gifts, and a tidy record makes that much easier.

Spouses, charities and family maintenance

• Spouse or civil partner. Gifts between spouses or civil partners are exempt without limit, as long as they are legally married or in a civil partnership and the recipient lives permanently in the UK. A limit applies where the giver is a long-term UK resident and the spouse is not.
• Charities and political parties. Gifts to UK charities and to qualifying political parties are exempt.
• Maintenance. Payments for the maintenance of a spouse or civil partner, for a child’s upkeep and education until they turn 18 or leave full-time education, and reasonable provision for a dependent relative are not treated as gifts for inheritance tax at all.

An example year of family gifts

Illustrative example

Patricia, 67, is invented for this example. She used none of her annual exemption last year.

Birthday money to four older grandchildren, £100 eachSmall gifts

£5,000 towards her daughter’s weddingWedding exemption

£6,000 to her son for a carAnnual exemption, this year and last

£150 a month from her pension for her youngest grandchild’s nurseryGifts from income, if conditions met

Gifts that count towards her estateNone

Illustration only. The small gifts exemption cannot be used for the same person as another exemption, which is why the youngest grandchild is not also on the birthday list. Whether a regular gift qualifies depends on the giver’s income, spending and the pattern of payments.

Who this matters for, and what to check

The exemptions matter most to people whose estate might be near or above the nil-rate band, and to anyone giving regularly to family. Even where no tax is likely, a short list of gifts saves executors guesswork.

• Keep a dated list of larger gifts, and of regular payments with a note of your income.
• Use the small gifts exemption for many modest presents, and the annual exemption for larger ones.
• If you plan to use a pension lump sum to help family, read how pension withdrawals are taxed first.
• Joint savings are treated differently; see what happens to a joint account after a death.