Taxation (UK) · The use of exemptions in deferring and minimising inheritance tax liabilities

Inheritance Tax Exemptions for Lifetime Gifts

Updated 11 October 2026 · Fact-checked

IHT exemptions reduce a lifetime gift before any nil rate band is used. First work out the loss to the donor. Then apply the specific exemptions: spouse, marriage, small gifts and normal expenditure out of income. Apply the annual exemption after them, to the earliest gifts first. What remains is the transfer of value.

Understand Inheritance Tax Exemptions for Lifetime Gifts

A lifetime gift is a transfer of value. Before you decide whether it is a potentially exempt transfer (PET) or a chargeable lifetime transfer (CLT), you work out the loss to the donor and then check whether any exemption applies. An exempt gift never uses up the nil rate band and never comes back into the death calculation.

The annual exemption is £3,000 per tax year. It is given to the donor, not the recipient. You use the current year's exemption first, then any amount brought forward. Only the unused part of the previous year's exemption carries forward, and only for one year. Any amount not used in the carry-forward year is lost.

The small gifts exemption covers total gifts of up to £250 per recipient in a tax year. If total gifts to one person in the year exceed £250, the small gifts exemption does not apply at all. You do not split it. You can still use the annual exemption on those gifts.

Marriage gifts are exempt up to a limit that depends on who makes the gift: £5,000 from a parent of the bride or groom; £2,500 from a grandparent or remote ancestor, or from one party to the marriage; and £1,000 from anyone else. The gift must be made on or shortly before the marriage and be conditional on it taking place.

Gifts between spouses and civil partners are exempt without limit. The exception is where the donor is UK domiciled and the recipient spouse is not. Then the exemption is limited to £325,000. This is a standard rule you need to know. The figure matches the nil rate band in the exam tables, but the tables do not label it as the spouse exemption limit.

The normal expenditure out of income exemption has no cash limit. The gift must be part of a regular pattern, paid out of income (not capital), and leave you with enough income to maintain your usual standard of living. Because it has no limit, it is often the most valuable exemption. Keep evidence of the pattern.

The nil rate band, residence nil rate band and tax rates are in ACCA's tax tables given in the exam. The £3,000, £250, marriage and spouse limits are standard rules that you need to know.

Key rules to remember

Annual exemption: £3,000 per tax year, plus unused amount from the previous year only; Use the current year's exemption first, then any amount brought forward. Only the unused part of the previous year's exemption carries forward, for one year.
Small gifts exemption: Up to £250 per recipient per tax year; Applies to total gifts to one person of up to £250 in the year. If total gifts to that person exceed £250, it does not apply at all, but the annual exemption can be used.
Marriage gifts: Parent £5,000; remote ancestor (e.g. grandparent) or one party to the marriage £2,500; anyone else £1,000; Given on or shortly before the marriage and conditional on it. One limit per donor per marriage.
Normal expenditure out of income: Exempt if regular, from income, and the donor's standard of living is maintained; No monetary limit. All three conditions must be met.
Spouse or civil partner gifts: Exempt without limit; Unless the donor is UK domiciled and the recipient spouse is not. Then the exemption is limited to £325,000. This is a standard rule. The figure matches the nil rate band in the exam tables, but the tables do not label it as the spouse exemption limit.
Order of use: Loss to the donor first; then the specific exemptions (spouse, marriage, small gifts, normal expenditure); annual exemption last; Compute the loss to the donor first. Apply the specific exemptions next; there is no need to treat them as a strict sequence among themselves. Apply the annual exemption after them, to the earliest gifts first.

How to solve Inheritance Tax Exemptions for Lifetime Gifts questions

Use this method for any lifetime gift question that asks you to find the taxable value after exemptions.

1List each gift in date order with its value and the recipient.
2Compute the loss to the donor for each gift if the question gives values before and after. This is the transfer of value.
3Remove spouse or civil partner gifts in full, unless the domicile condition in the question restricts them.
4Apply the marriage exemption to any gift made on the occasion of a marriage, using the correct limit for the donor.
5Apply small gifts (total of £250 or less per person) and normal expenditure out of income where the facts support them. These specific exemptions all come before the annual exemption.
6Apply the annual exemption after the specific exemptions, to the earliest gifts first: current year first, then the brought-forward amount from the previous year.
7Treat any remaining value as a PET or CLT and carry on with the nil rate band, tax and taper relief as the question requires.
8Write down the unused annual exemption at the end of the year, noting the carry forward is for one year only.

Quickest way: Exemption order check

When to use it: Use when a question gives several gifts in one or two tax years and asks for the amount that is not exempt.

Underline the donor, recipient and date of each gift.
Find the loss to the donor for each gift.
Cross out spouse gifts and marriage gifts, using the limit for the donor.
Check whether total gifts to each person in the year are £250 or less.
Look for words such as regular, out of income or birthday and Christmas; these point to normal expenditure.
Only then use £3,000 on the earliest remaining gift, then the carry forward, and note what is left.

Common mistakes in Inheritance Tax Exemptions for Lifetime Gifts

Carrying the annual exemption forward for more than one year.
Students assume unused amounts keep accumulating.
Fix: Carry forward only to the next tax year. If the carried amount is not used then, it is lost.
Using the brought-forward exemption before the current year's exemption.
It looks like the older amount should go first.
Fix: Always use the current year's £3,000 first, then the amount brought forward.
Applying the small gifts exemption to the first £250 of a larger total.
Students treat it like an allowance that can be split.
Fix: If total gifts to one person in the year are over £250, the small gifts exemption cannot be used at all. Use the annual exemption instead.
Giving the marriage exemption at the wrong limit.
The limits are easy to mix up.
Fix: Memorise parent £5,000, remote ancestor or one party to the marriage £2,500, anyone else £1,000. Identify who is making the gift first.
Claiming normal expenditure out of income without testing all conditions.
Students see a regular gift and stop there.
Fix: Check that the gift is a regular pattern, paid from income and does not reduce the donor's standard of living. Say which fact in the question supports each condition.
Using the annual exemption before the specific exemptions.
It is the best known exemption.
Fix: Compute the loss to the donor, then apply the specific exemptions (spouse, marriage, small gifts and normal expenditure). Apply the annual exemption after them, to the earliest gifts first.

Worked examples

Example 1

In June 2025 Anya gave £10,000 to her son as a gift with no other exemption available. She made no other gifts in 2024-25 or 2025-26. Find the amount of the gift after the annual exemption.

Show the solution

The gift is a lifetime transfer to a son. No spouse, marriage, small gift or income exemption applies.
2025-26 annual exemption is £3,000 and is used first.
2024-25 annual exemption of £3,000 was unused, so it is carried forward and used second.
Total exemptions available are £3,000 + £3,000 = £6,000.
Taxable value is £10,000 - £6,000 = £4,000.

Answer: The gift after exemptions is £4,000. As a gift to an individual, it is a PET. No annual exemption is left to carry forward.

Example 2

Ben, who is a parent of the bride, gave her £7,000 on her wedding day in 2025-26. He had made no other gifts in 2025-26 and had used his full annual exemption in 2024-25. Find the value after exemptions.

Show the solution

The gift is made on the occasion of marriage by a parent, so the marriage exemption is £5,000.
The value after marriage exemption is £7,000 - £5,000 = £2,000.
The 2025-26 annual exemption is £3,000 and is available.
The annual exemption is used against the remaining £2,000, leaving £1,000 unused.
The 2024-25 annual exemption was fully used so there is nothing brought forward.
The taxable value is £2,000 - £2,000 = £0.

Answer: The gift is fully exempt and the taxable value is nil. £1,000 of the 2025-26 annual exemption is unused and can be carried forward to 2026-27.

Exam tips

Show the order of exemptions clearly: specific exemptions first, annual exemption after them. Marks are given for the method, not just the answer.
Write the carry forward amount at the end of each tax year, even if it is nil.
For normal expenditure, quote the three conditions and tie each to a fact in the question.
In objective tests, check whether total gifts to that person in the year are over £250 before you consider small gifts.
Check the date. A gift made on 5 April and one on 6 April fall into different tax years and use different exemptions.

Practice questions from The use of exemptions in deferring and minimising inheritance tax liabilities

Inheritance Tax Exemptions 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.

Inheritance Tax Exemptions for Lifetime Gifts: frequently asked questions

How does the annual exemption carry forward work?

You get £3,000 each tax year. Any unused part can be carried forward to the next tax year only. You use the current year's exemption first, then the carried amount.

What is the difference between the annual exemption and the small gifts exemption?

The annual exemption is £3,000 per donor per tax year and can be spread across gifts. The small gifts exemption is £250 per recipient per tax year and does not apply at all if total gifts to that person in the year are larger than £250.

What are the marriage gift limits?

A parent can give £5,000. A grandparent or remote ancestor, or one party to the marriage, can give £2,500. Anyone else can give £1,000. The gift must be made on or shortly before the marriage and be conditional on it.

Does normal expenditure out of income have a limit?

No. The gift must be regular, paid from income and leave the donor able to maintain their normal standard of living. If these conditions are met it is fully exempt.