What counts as a gift for inheritance tax?
Anything of value you give away during your life: money, household and personal goods, a house, land or buildings, and shares. Selling something for less than it is worth also counts, because the difference is a gift. Something you leave in your will is not a gift; it is part of your estate (GOV.UK: rules on giving gifts).
Which gifts are exempt straight away?
These gifts are free of inheritance tax whenever you die. Allowances reset each tax year, which runs from 6 April to 5 April.
| Exemption | Limit | Conditions |
|---|---|---|
| Spouse or civil partner | Unlimited | Legally married or in a civil partnership. Capped at £325,000 if you are a long-term UK resident and they are not. |
| Charities and political parties | Unlimited | Qualifying charities, community amateur sports clubs and political parties. |
| Annual exemption | £3,000 a tax year | To one person or split between several. Unused exemption carries forward one tax year only. |
| Small gifts | £250 per person | As many people as you like, but not to someone who has had another allowance from you in the same tax year. |
| Wedding or civil partnership gifts | £5,000 to a child; £2,500 to a grandchild or great-grandchild; £1,000 to anyone else | Given to someone getting married or forming a civil partnership. Can be combined with the annual exemption. |
| Normal expenditure out of income | No set limit | Regular gifts from income that leave you enough to maintain your usual standard of living. |
GOV.UK’s example: Mark gives £2,000 in one tax year and £4,000 the next. The second gift uses that year’s £3,000 plus the £1,000 left from the year before, so neither gift is taxable even if he dies within seven years.
How does the seven-year rule work?
A gift to a person that is not exempt is a “potentially exempt transfer”. If you live for seven years after making it, it becomes fully exempt. If you die within seven years, it “fails” and is counted when the tax on your death is worked out:
- Gifts from the seven years before death are taken in date order, oldest first.
- They use up your £325,000 nil-rate band before your estate can use it.
- Any gifts above the nil-rate band are taxed at 40%, reduced by taper relief if they were made more than three years before death.
- Your estate then gets whatever nil-rate band is left, plus any residence nil-rate band, which lifetime gifts cannot use.
So a gift that is itself within the nil-rate band still matters: it reduces the tax-free amount left for your estate. The residence nil-rate band is unaffected, because it applies only to the estate on death (GOV.UK: residence nil-rate band and lifetime gifts).
Gifts into most trusts work differently. They are chargeable when made, at 20% on the amount above your available nil-rate band, with more to pay if you die within seven years (GOV.UK: trusts and inheritance tax). Trust gifts need individual advice.
How does taper relief work?
Taper relief reduces the tax on a gift made more than three years before death. The statute sets it as a percentage of the full tax, which GOV.UK expresses as an effective rate (Inheritance Tax Act 1984, section 7(4)).
| Years between gift and death | Tax charged, as a share of full tax | Effective rate |
|---|---|---|
| 3 years or less | 100% | 40% |
| More than 3, up to 4 | 80% | 32% |
| More than 4, up to 5 | 60% | 24% |
| More than 5, up to 6 | 40% | 16% |
| More than 6, up to 7 | 20% | 8% |
| More than 7 | No tax | 0% |
Three points are often misunderstood:
- It reduces the tax, not the gift. The full value of the gift still uses up the nil-rate band.
- It only helps when gifts exceed £325,000. GOV.UK: taper relief only applies if the gifts made in the seven years before death total more than the tax-free threshold.
- It does not reduce the tax on the estate. The estate still pays 40% on everything above the allowances left to it.
Worked example: a mother gives her daughter £400,000 four and a half years before she dies and makes no other gifts. Her annual exemptions for that tax year and the one before were unused, so £6,000 comes off and £394,000 counts. The first £325,000 is covered by the nil-rate band, leaving £69,000. Full tax at 40% would be £27,600; taper relief at 60% brings it to £16,560, which the daughter pays. Her mother’s estate then has no nil-rate band left, only any residence nil-rate band.
Who pays the tax on a gift?
GOV.UK explains that tax on gifts is usually paid by the estate unless more than £325,000 was given in the seven years before death. Once gifts pass that level, the people who received the later gifts have to pay the tax on them (GOV.UK: rules on giving gifts). Someone receiving a large gift should keep that possibility in mind for seven years.
What counts as a gift out of income?
Regular gifts are exempt without any cash limit if you can show all three conditions in the law (Inheritance Tax Act 1984, section 21):
- they formed part of your normal expenditure, usually a regular pattern;
- taking one year with another, they were made out of income, not capital;
- after making them you still had enough income to keep your usual standard of living.
GOV.UK’s examples include paying a child’s rent, paying into a savings account for a child under 18 and supporting an elderly relative. HMRC treats income as net of income tax and generally regards income saved for more than two years as having become capital (HMRC manual IHTM14250). The exemption depends on evidence, so keep a yearly record of your income, spending and gifts.
What is a gift with reservation of benefit?
It is a gift you keep benefiting from, and it still counts as part of your estate when you die, however long ago you made it. GOV.UK’s examples: giving your home to a relative but still living there, giving away a caravan but using it for free holidays, or giving away a painting that still hangs in your house.
To give away a home and keep living in it without a reservation, you normally need to pay the new owner a full market rent and your share of the bills. There is an exception if you give away only part of the property and the new owners live there with you (GOV.UK: passing on a home). The seven-year clock does not run while you keep the benefit; if the benefit stops, the gift is treated as made at that point.
One consequence surprises people: a home given to your children that you keep living in stays in your estate, but it can still attract the residence nil-rate band because the gift was to direct descendants (Inheritance Tax Act 1984, section 8J(6)). Arrangements designed to sidestep these rules can trigger a separate income tax charge on pre-owned assets (HMRC manual IHTM14301).
What records should you keep?
- what you gave and who you gave it to;
- the value of the gift, and how you valued anything other than cash;
- the date you gave it;
- for gifts from income, your income and spending for each year.
Your executors will need these to complete schedule IHT403 with form IHT400. Full details are required, even where no tax is due, if you gave away more than £250,000 in the seven years before death (GOV.UK: value an estate). A record kept with your will helps: the executor handover template has space to note where your records are.
How do lifetime gifts interact with your will?
A will only deals with what you still own when you die, so it cannot undo a gift or its tax. Lifetime gifts can make a will’s shares look different in practice: if you gave one child a large sum, an equal split of the residue does not rebalance it unless the will says so, and that kind of clause needs a solicitor. Gifts also use the nil-rate band first, which can leave more tax for the residue to bear. See what a residuary estate is.
Business and farm property has its own rules. For gifts of such property made from 30 October 2024 where the giver dies on or after 6 April 2026 within seven years, the new £2.5 million limit on 100% relief applies (HMRC policy paper).
When should you get advice?
Lifetime gifting strategies need individual advice from a solicitor, tax adviser or regulated financial adviser, especially gifts into trust, giving away a home, gifts of business or farm assets, and large gifts you may need back later. SwiftWill’s automated will does not do tax planning: it records who inherits what you own at death and does not assess your gifts, reliefs or tax position. Start with our inheritance tax guide and when to use a solicitor.
Sources
- GOV.UK: rules on giving gifts
- GOV.UK: passing on a home
- Inheritance Tax Act 1984, section 7 (rates and taper relief)
- Inheritance Tax Act 1984, section 21 (normal expenditure out of income)
- HMRC manual IHTM14231 and IHTM14250 (gifts out of income)
- HMRC manual IHTM14301 (gifts with reservation)
- GOV.UK: trusts and inheritance tax
- GOV.UK: how to value an estate and report its value
- HMRC form IHT403: gifts and other transfers of value
Sources checked 24 September 2026.