Taxation (UK) · The basic principles of computing transfers of value

Exemptions and Reliefs for Lifetime Gifts in ACCA Taxation (UK)

Updated 11 October 2026 · Fact-checked

Lifetime gifts are first reduced by exemptions before they are treated as potentially exempt or chargeable transfers. The main ones are the £3,000 annual exemption (with one year's carry forward), £250 small gifts, marriage gifts, normal expenditure out of income, and spouse and charity gifts. Apply them in date order.

Understand Exemptions and Reliefs for Lifetime Gifts

Inheritance tax (IHT) applies to a transfer of value, which is a gift that reduces the donor's estate. Many gifts are exempt. Exemptions are applied first, to find the amount that is actually a transfer that can be taxed.

Some exemptions have no limit. A gift to your spouse or civil partner is exempt without limit, and so is a gift to a UK charity. (The spouse exemption is restricted if the donor is UK domiciled and the spouse is not. This is outside the usual TX scope, so assume the full exemption unless told otherwise.)

Other exemptions are capped. The annual exemption is £3,000 for each tax year. If you did not use it all in the previous year, you can carry the unused part forward one year only. The current year's exemption is always used first, then the brought-forward amount. Unused exemption from two years back is lost.

The small gifts exemption covers gifts to any one person that total up to £250 in a tax year. If total gifts to that person in the year exceed £250, the small gifts exemption is lost for that person. You can then use the annual exemption on those gifts instead.

Marriage gifts are exempt up to £5,000 from a parent, £2,500 from a grandparent or remoter ancestor (or from one party to the marriage to the other), and £1,000 from anyone else. The gift must be made on or shortly before the marriage and conditional on it taking place. Normal expenditure out of income is exempt without limit if the gift is part of a regular pattern, is paid from income rather than capital, and leaves the donor with enough income to maintain their usual standard of living.

Key rules to remember

Annual exemption: £3,000 per tax year, plus unused amount from the previous year only; The unused part of a year's exemption is carried forward one year only. It is used only after the following year's own exemption has been fully used.
Small gifts exemption: Gifts to any one person totalling up to £250 per tax year; If total gifts to that person in the tax year exceed £250, the small gifts exemption is lost for that person. The annual exemption can then be used instead.
Marriage gift exemption: Parent £5,000; grandparent or remoter ancestor £2,500; bride or groom to the other £2,500; anyone else £1,000; The gift must be made in consideration of the marriage.
Normal expenditure out of income: Exempt if: part of normal (habitual) pattern + paid out of income + donor's usual standard of living is maintained; No upper limit. Keep evidence of the pattern.
Spouse and charity: Unlimited exemption for gifts to a spouse/civil partner and to UK charities; Apply these first, before other exemptions.
Order of applying exemptions: Gifts in date order; for the annual exemption use current year first, then brought-forward; Where several gifts are made on the same day, share the exemption pro rata.
Nil rate band reminder: Nil rate band £325,000; lifetime rate 20%; death rate 40%; Exemptions reduce the gift before it is measured against the nil rate band.

How to solve Exemptions and Reliefs for Lifetime Gifts questions

Use this order for any question asking for the taxable value of lifetime gifts.

1List each gift in date order with the date, recipient and the fall in the donor's estate (loss to donor), not the value received.
2Remove gifts that are fully exempt: spouse or civil partner, UK charity, and normal expenditure out of income if all three conditions are met.
3Deal with gifts on marriage and apply the right limit for the relationship of donor to the couple.
4Apply the £250 small gifts exemption to any recipient who received £250 or less in total in the tax year.
5Apply the annual exemption by tax year (6 April to 5 April): the current year's £3,000 first, then any amount unused in the previous year, to gifts in date order.
6Work out the unused annual exemption for each year and carry forward the amount to the next year only if it is unused.
7State the net value left, which is the PET or CLT, and note any further steps (nil rate band, taper relief) only if asked.

Quickest way: Year-by-year exemption grid

When to use it: Use when a question has several gifts over two or more tax years and asks for the net chargeable amounts.

Draw a column for each tax year and write £3,000 at the top, with the previous year's unused amount beside it.
Strike out exempt gifts first, then take off marriage and small gifts.
Allocate the annual exemption to the earliest gift in each year, current year first, then brought forward.
Write down the unused exemption at the foot of each year, only carrying it forward one year.
Check that the total of exemptions plus net gifts equals the total gifts made.

Common mistakes in Exemptions and Reliefs for Lifetime Gifts

Carrying forward the annual exemption for more than one year.
Students think unused exemption builds up each year.
Fix: Carry forward to the next year only. If it is not used in that next year, it is lost.
Using the brought-forward exemption before the current year's exemption.
Students think the earlier amount should go first.
Fix: Use the current year's £3,000 first, then the brought-forward amount.
Applying the £250 small gifts exemption to part of a larger gift, or when total gifts to one person in the year exceed £250.
Students treat £250 as a free allowance on top of other gifts.
Fix: It applies only where total gifts to that person in the tax year are £250 or less. If the total is more, it is lost for that person. Use the annual exemption instead.
Applying the annual exemption to a gift to a spouse or charity.
Students do not remove fully exempt gifts first.
Fix: Remove fully exempt gifts first so the annual exemption is saved for gifts that need it.
Using the wrong marriage limit or ignoring the timing condition.
The limits depend on the relationship and are easy to mix up.
Fix: Check who is giving: £5,000 parent, £2,500 grandparent or between the couple, £1,000 anyone else. The gift must be made in consideration of the marriage.
Claiming normal expenditure out of income without checking the conditions.
Students see regular gifts and assume they qualify.
Fix: Test all three conditions: regular pattern, paid from income, and the donor's usual standard of living is maintained. If one fails, the exemption fails.

Worked examples

Example 1

Anna made no gifts before 2025–26. On 10 June 2025 she gave £10,000 to her son. On 5 August 2025 she gave £4,000 to her husband. On 1 December 2025 she gave £2,000 to a UK charity. Find the amount of the gift to her son that remains after exemptions.

Show the solution

The gift to her husband (£4,000) is exempt without limit. The gift to charity (£2,000) is also exempt without limit.
The son's gift of £10,000 is the only gift left. There is no small gifts exemption as it exceeds £250.
The annual exemption for 2025–26 is £3,000. Anna made no gifts in 2024–25, so the full £3,000 exemption for 2024–25 is unused and is carried forward.
Total annual exemption available is £3,000 (2025–26) + £3,000 (brought forward) = £6,000. Use 2025–26 first and then the amount brought forward.
Net gift = £10,000 − £6,000 = £4,000.

Answer: £4,000 remains as a potentially exempt transfer (PET). Both annual exemptions are used up.

Example 2

Ben gave his daughter £8,000 on 1 May 2025, conditional on her marriage, which took place a few days later. He also gave £200 each to two friends on 20 May 2025. His annual exemption for 2024–25 was fully used and he has made no other gifts. Calculate the net transfers for 2025–26.

Show the solution

The gift was made shortly before the marriage and is conditional on it, so it qualifies as a marriage gift. A parent can give up to £5,000 exempt. Remaining gift = £8,000 − £5,000 = £3,000.
The gifts of £200 to each friend are each £250 or less in total to that person, so each is covered by the small gifts exemption and is exempt.
The annual exemption for 2025–26 is £3,000. Nothing is brought forward because the 2024–25 exemption was fully used.
Apply the annual exemption in date order. The first non-exempt gift is the remaining £3,000 of the daughter's gift, so the £3,000 annual exemption covers it. Net value = £0.
The 2025–26 annual exemption is fully used, so there is no unused amount to carry forward.

Answer: All gifts are covered by exemptions, so the net transfer is £0 and nothing is carried forward.

Exam tips

Always lay out gifts by tax year in date order. Markers award marks for correct allocation of the exemption, not just the final figure.
In objective questions, look for the trick: a gift to a spouse or charity, or a gift of £250 or less, that should be taken out first.
For marriage gifts, check who the donor is. The limit changes for parents, grandparents and others.
When a question says gifts were made regularly from income, list the three conditions in your written answer and state whether each is met.
Show the unused annual exemption carried forward at the end of each year, even if it is nil.

Practice questions from The basic principles of computing transfers of value

Exemptions and Reliefs for Lifetime Gifts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalInheritance Tax Planning: Lifetime Gifts and Wills

Exemptions and Reliefs for Lifetime Gifts: frequently asked questions

Can I carry forward the inheritance tax annual exemption of £3,000?

Yes, but only to the next tax year and only if you did not use it in the year it arose. You use the current year's exemption first and then the brought-forward amount. If you do not use the brought-forward amount in the next year, it is lost.

What are the conditions for the normal expenditure out of income exemption?

The gifts must be part of a regular pattern, be paid out of income rather than capital, and leave the donor able to maintain their usual standard of living. If all three are met, the gifts are exempt with no limit. You should keep records to prove the pattern.

How do I apply the annual exemption to several gifts in the same year?

Apply it to gifts in the order they were made, current year first and then the amount brought forward. If gifts are made on the same day, share the exemption between them in proportion to their values. Fully exempt gifts such as those to a spouse or charity should be removed first.

Can I use the small gifts exemption and the annual exemption on the same person?

The small gifts exemption covers gifts to one person totalling up to £250 in a tax year. If total gifts to that person in the year exceed £250, it is lost for that person. You then use the annual exemption on those gifts instead.