How Much Can I Gift Each Year Tax Free?

Introduction

Making financial gifts to family or friends is a common way to share your wealth or support loved ones. However, many people worry about whether their gifts might trigger an Inheritance Tax (IHT) charge later on. The good news is that HMRC allows you to give away a certain amount each year completely tax free.

Understanding how these allowances work helps you plan your finances efficiently and avoid unexpected tax bills. This article explains how much you can gift each year without paying tax, what qualifies as an exempt gift, and how larger gifts are treated for Inheritance Tax purposes.

What Counts as a Gift?

For Inheritance Tax, a gift is anything that has value or reduces the value of your estate. This includes:

• Money, property, or personal belongings

• The sale of something at below market value (for example, selling a property cheaply to a family member)

• Paying someone’s living costs or debts

If you continue to benefit from the gift after giving it away such as gifting your home but continuing to live there rent free it is known as a “gift with reservation” and will still count as part of your estate for IHT purposes.

The Annual Exemption

Every individual has an annual gift allowance of £3,000 per tax year. This is called the annual exemption, and it allows you to give away up to £3,000 each year without it being added to the value of your estate for Inheritance Tax.

Key points about the annual exemption:

• You can give the £3,000 to one person or split it between several people.

• If you did not use your allowance last year, you can carry it forward one year only, allowing you to gift up to £6,000 tax free in the current year.

• Couples can combine their allowances, meaning a married couple or civil partners can jointly give away up to £6,000 per year, or £12,000 if they have unused allowances from the previous year.

Any gifts above your allowance may be subject to Inheritance Tax if you die within seven years of making them.

Small Gift Allowance

In addition to the annual exemption, you can also make small gifts of up to £250 per person per year to as many people as you like.

This allowance cannot be used for the same person who has already received part of your £3,000 annual exemption in that tax year.

For example, you could give ten grandchildren £250 each in one tax year, and those gifts would be fully exempt.

Wedding or Civil Partnership Gifts

Certain gifts made for weddings or civil partnerships are also exempt from Inheritance Tax, provided they are made before the ceremony and the marriage actually takes place.

The limits are:

• Up to £5,000 to a child

• Up to £2,500 to a grandchild or great-grandchild

• Up to £1,000 to anyone else

These exemptions are separate from the annual £3,000 allowance, so they can be used in the same year as other gifts.

Regular Gifts from Income

You can also make regular gifts from your surplus income that are immediately exempt from Inheritance Tax. This rule applies only if the gifts:

• Are made from your normal after-tax income (not savings or investments).

• Do not reduce your standard of living.

• Form a regular pattern of giving (for example, monthly or annual payments).

Common examples include helping an adult child with rent, paying grandchildren’s school fees, or making regular charity donations.

You should keep detailed records showing that the gifts came from income and were part of your usual expenditure, in case HMRC asks for evidence later.

Gifts to Spouses and Charities

Gifts between spouses or civil partners are always free from Inheritance Tax, provided both are UK-domiciled. There is no upper limit.

Gifts to UK-registered charities are also fully exempt from IHT, no matter how large the amount.

If you leave at least 10% of your estate to charity in your will, the overall Inheritance Tax rate on the rest of your estate is reduced from 40% to 36%.

Larger Gifts and the Seven-Year Rule

If you give away more than your annual allowance, the excess amount may still be exempt from IHT depending on how long you live after making the gift.

This is known as the seven-year rule. If you survive for seven years after making a gift, it becomes completely exempt from Inheritance Tax.

If you die within seven years, the gift is treated as a potentially exempt transfer (PET) and may be added back to your estate. However, taper relief can reduce the amount of tax payable depending on how long you lived after making the gift:

Years between gift and death Percentage of full tax due

0 3 years 100%
3 4 years 80%
4 5 years 60%
5 6 years 40%
6 7 years 20%

After seven years, no IHT is due on the gift.

Example Scenario

David gives his daughter £20,000 in May 2020. He has not used his annual exemption for that tax year, so the first £3,000 is immediately tax free. The remaining £17,000 is treated as a potentially exempt transfer.

David dies five years later in 2025. The £17,000 is included in his estate for IHT, but taper relief reduces the tax payable to 40% of the full amount that would otherwise be due.

If David had lived beyond May 2027 (seven years after the gift), no tax would have been payable on that gift at all.

Keeping Records of Gifts

Executors must report gifts made by the deceased when applying for probate, so it is important to keep clear records. Maintain a list of:

• The date and amount of each gift

• The name and relationship of each recipient

• Whether it came from income or savings

This information will help HMRC confirm which gifts are exempt and prevent delays in estate administration.

The Role of an Accountant or Financial Adviser

An accountant or financial adviser can help you:

• Plan gifts strategically to use all available exemptions

• Structure larger gifts to minimise potential tax liability

• Keep accurate records for HMRC

• Ensure regular gifts qualify as exempt from income

• Review your estate plan to maximise allowances for you and your spouse

Professional advice is especially useful for individuals with large estates, overseas assets, or complex family arrangements.

Conclusion

You can gift up to £3,000 per year tax free, plus additional small gifts and wedding gifts under separate exemptions. Larger gifts may also become tax free if you live for seven years after making them.

With careful planning and record keeping, you can share your wealth efficiently and reduce future Inheritance Tax on your estate. Consulting an accountant or financial planner can help ensure that every gift is managed correctly and that you make the most of your available allowances.