UK Tax on Gifts and Money: IHT, CGT and Income Tax Rules (2026/27)

IHT Annual Exemptions

The most important IHT exemption for everyday giving is the annual exemption of £3,000 per donor per tax year. Gifts covered by this exemption are immediately outside the estate — no seven-year survival rule applies. Key points:

• The £3,000 can be split among any number of recipients — you could give £1,000 each to three different people, or £3,000 to one person.
• If you did not use your annual exemption in the previous tax year, you can carry it forward once — giving up to £6,000 in total in the current year (your current year's £3,000 plus last year's £3,000). The current year's exemption is used first.
• The carry-forward only applies to one previous year — you cannot accumulate unused exemptions over multiple years.
• The £3,000 exemption has been frozen since 1981, meaning its real value has declined significantly. There was no increase in the March 2024 Budget.

The annual exemption applies per donor — so married couples or civil partners can each use their own £3,000 exemption, effectively giving £6,000 per year (or £12,000 if both carried forward from an unused prior year) free of IHT.

Small Gifts and Wedding Exemptions

Alongside the annual exemption, two further IHT exemptions are widely used:

Small gifts exemption

You can give up to £250 per person per tax year to any number of individuals, completely free of IHT. There is no limit on the number of recipients. However, you cannot combine the small gifts exemption with the annual exemption to the same person in the same tax year — if you give someone more than £250, the full amount falls under the annual exemption (or becomes a PET if it exceeds that too).

Wedding and civil partnership gifts

Wedding gifts must be made on or before the wedding day and must be conditional on the wedding taking place. If the wedding is called off after the gift is made, the exemption does not apply. Wedding exemptions can be used in addition to the annual £3,000 exemption — so a parent could give a child £5,000 (wedding exemption) plus £3,000 (annual exemption) = £8,000 in a single tax year, all immediately exempt from IHT.

Normal Expenditure Out of Income

One of the most powerful — and most underused — IHT exemptions is the normal expenditure out of income exemption (Inheritance Tax Act 1984, s.21). Unlike the annual exemption, there is no cap on this exemption. It allows you to make regular gifts from your surplus post-tax income without any IHT consequences, provided three conditions are met:

1. Regular pattern: The gifts must form part of your normal expenditure — they should be regular and recurring (annually, monthly or at another set interval). A single one-off gift does not qualify.
2. Made from income: The gifts must be made from post-tax income, not from capital or savings. Income includes salary, pension, dividends, rental income and interest — but not capital receipts.
3. No reduction in standard of living: After making the gifts, you must have sufficient income remaining to maintain your usual standard of living. You cannot gift income that you would otherwise need for living expenses.

HMRC requires executors to complete Form IHT403 on death, showing the pattern of gifts, your income, and your expenditure for each of the last seven years. If records are not kept, executors struggle to claim this exemption — HMRC will challenge it.

A common use of this exemption is a grandparent or parent with a large pension who pays into grandchildren's Junior ISAs or SIPPs regularly from their pension income. If structured correctly and documented annually, the entire amount can be outside the estate immediately.

Potentially Exempt Transfers (PETs)

Any gift made by an individual to another individual that exceeds the available exemptions is a Potentially Exempt Transfer (PET). PETs are:

• Not reported to HMRC at the time of the gift.
• Not subject to any IHT at the time of the gift.
• Fully exempt from IHT if the donor survives seven years from the date of the gift.
• Brought back into the estate for IHT if the donor dies within seven years — subject to taper relief.

PETs can be gifts of cash, shares, property, or any other asset. Gifts to most trusts are NOT PETs — they are Chargeable Lifetime Transfers (see below). Gifts to individuals — including adult children, grandchildren, friends and other relatives — are PETs.

When calculating IHT on a PET that fails (donor dies within seven years), the PET is added to the estate and assessed against the available Nil Rate Band (£325,000 in 2026/27). If the donor made other gifts in the seven years before the PET, those gifts are considered first, potentially using up the NRB and leaving the PET fully exposed to 40% IHT.

Taper Relief: IHT Reduction Table

If a PET fails (donor dies within seven years), taper relief reduces the IHT due on the gift based on how many years the donor survived after making it:

Important: taper relief reduces the IHT on the gift — not on the whole estate. Also, taper relief only helps if the value of the gift exceeds the available Nil Rate Band (after accounting for other gifts in the same seven-year window). If the gift falls within the NRB, there is no IHT to taper in the first place.

Chargeable Lifetime Transfers (CLTs)

Unlike PETs, Chargeable Lifetime Transfers (CLTs) — typically gifts into discretionary trusts — attract an immediate IHT charge at the lifetime rate of 20% on the value above the available Nil Rate Band at the time of the gift. If the donor then dies within seven years, a further charge at 20% (to bring the total to 40%) may apply.

CLTs must be reported to HMRC within 12 months of the end of the tax year in which they were made (if they exceed the NRB). Trusts also face a 10-yearly periodic charge of up to 6% of trust assets above the NRB, and exit charges when assets leave the trust.

Most straightforward family giving does not involve CLTs — they arise in complex estate planning involving discretionary trusts. If you are considering a trust structure, regulated financial advice from a specialist estate planner is essential.

Gifts With Reservation of Benefit (GROBs)

A gift with reservation of benefit (GROB) occurs when you give an asset away but continue to benefit from it after the gift. The most common example is giving your home to your children while continuing to live in it rent-free or at below-market rent. Under the Finance Act 1986, a GROB is treated as if the gift was never made — the asset remains in your estate at its date-of-death value for IHT.

How to avoid the GROB trap: To genuinely remove your home from your estate, you must either:

• Pay a full commercial market rent to your children after the gift (the rental income they receive will be taxable on them). You must also survive seven years from the date the gift became unconditional.
• Move out of the property entirely, permanently, and survive seven years from the date you vacate. Your children must have genuine exclusive possession.

Even if you successfully avoid the GROB rules, transferring property to children can trigger CGT (if it is not your principal private residence) and SDLT (if there is an outstanding mortgage). The interaction of all three taxes must be modelled before proceeding.

Pre-Owned Asset Tax (POAT): Even if the GROB rules do not strictly apply (because of careful structuring), HMRC may impose POAT — an annual income tax charge based on the notional rental value of assets you formerly owned and continue to benefit from. POAT was introduced in 2005 to counter GROB-avoidance schemes.

Income Tax on Gifts

In general, gifts of money are not taxable income for the recipient — receiving £10,000 from a parent does not need to be reported on your Self Assessment or anywhere else. The same is true for gifts of assets.

However, income generated by gifted assets is taxable in the hands of the recipient. If your parent gives you £50,000 and you earn 5% interest on it, the £2,500 interest is your taxable income. You report it on your tax return if it exceeds the relevant thresholds (Personal Savings Allowance: £500 for higher-rate taxpayers, £1,000 for basic-rate in 2026/27; starting-rate band: £5,000 of savings income taxed at 0% if your non-savings income is below £17,570).

Settlement Rules: Gifts to Minor Children

The parental settlement rule (Income Tax (Trading and Other Income) Act 2005, s.629) is an anti-avoidance provision that prevents parents from reducing their income tax by gifting income-producing assets to their minor children:

• If a parent gifts money or an asset to their unmarried child under 18, and the income generated from the gift exceeds £100 per year, all of that income is taxed on the parent at their marginal rate — not on the child.
• The £100 threshold applies per child, per parent (not per gift). Once income exceeds £100, the entire amount (not just the excess) is taxed on the parent.
• This rule applies only to parents — gifts from grandparents, other relatives and third parties do not trigger it. A grandparent can gift money to a grandchild's Junior ISA or bare trust and the income is taxed on the grandchild (who may have their full Personal Allowance available).
• The rule ceases when the child turns 18 or gets married before 18.

Junior ISAs (up to £9,000/year in 2026/27) are a useful solution — income within a JISA is completely free of income tax and CGT regardless of who funded it.

Capital Gains Tax on Gifts

Gifting an asset to someone other than your spouse or civil partner is treated as a disposal at market value for CGT purposes — even if no money changes hands. This means you may owe CGT on the gain between your original cost (or market value at April 1982 if acquired before then) and the market value at the date of the gift.

CGT rates on gifts of residential property are 18% (basic rate) / 24% (higher/additional rate) in 2026/27. For other assets (shares, business interests), 18% / 24% also apply (following the October 2024 Budget rate changes). For qualifying business assets, Business Asset Disposal Relief (formerly Entrepreneurs' Relief) may reduce the rate to 10% on the first £1m of lifetime gains.

Gift relief (holdover relief) under s.165 TCGA 1992 can defer CGT on gifts of business assets — the gain is "held over" into the recipient's base cost. It does not apply to gifts of cash, investment property or quoted shares (with some exceptions for gifts to trusts).

Worked Examples

Practical Tips and Record-Keeping

• Use the annual exemption every year. It cannot be carried forward more than one year — unused exemptions are lost. Set a reminder to make £3,000 of gifts before 5 April each year.
• Consider gifting in tranches. Rather than one large PET, using annual exemptions over multiple years reduces the IHT exposure on each tranche and starts the seven-year clock earlier.
• Document 'normal expenditure' gifts annually. Keep a log of your income, living expenses, and gifts. HMRC Form IHT403 is the template — fill it in each year, not just on death.
• Use Junior ISAs for grandchildren. Gifts into a JISA grow completely free of income tax and CGT, and the parental settlement rule does not apply to grandparental contributions.
• Take specialist advice before gifting property. The interaction of IHT (GROBs), CGT and SDLT makes property gifting complex. A bad structure can result in all three taxes applying with no offsetting benefit.
• Consider life insurance in trust. A decreasing-term life insurance policy written in trust can cover the IHT liability on a PET if you die within seven years — the payout goes directly to beneficiaries without adding to your estate.