Advanced Taxation (UK) · Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death

IHT Lifetime Exemptions and Reliefs for ACCA ATX

Updated 11 October 2026

IHT lifetime exemptions reduce the value of a gift before it is treated as a transfer. You deduct them in a set order: marriage gifts first, then the annual exemption (£3,000, current year first, then any unused amount from last year). Small gifts apply only to recipients with no other exemption. Normal expenditure out of income is fully exempt if its conditions are met.

Understand Lifetime Exemptions and Reliefs

Inheritance tax (IHT) charges a lifetime transfer only if value leaves your estate. Before you test whether a gift is a potentially exempt transfer (PET) or a chargeable lifetime transfer (CLT), you first apply the exemptions. They cut the value that is left to tax.

The amounts of the annual, small gifts and marriage exemptions are not in the ACCA tax table. You must learn them.

Some exemptions are capped. The annual exemption is £3,000 for each tax year. If you did not use all of it last year, the unused part carries forward for one year only. You must use the current year's exemption first, then the amount brought forward. The carry forward is lost if it is not used in the next year.

Other exemptions depend on the relationship or purpose. The small gifts exemption is £250 per recipient per tax year. It cannot be combined with another exemption on gifts to the same person. Marriage gifts are exempt up to £5,000 from a parent, £2,500 from a grandparent or remoter ancestor, £2,500 from one party to the marriage to the other, and £1,000 from anyone else. The gift must be made in consideration of the marriage, on or shortly before it. If the marriage does not take place, the exemption is not available.

The normal expenditure out of income exemption has no cap. It applies when the gift is part of a regular pattern, is paid out of income (not capital), and leaves you able to keep your usual standard of living. Failing any one condition loses the exemption.

Gifts between spouses or civil partners are exempt, and gifts to qualifying charities are exempt. Both are unlimited, with one exception. Where the donor is UK domiciled and the spouse or civil partner is not, the spouse exemption is limited to £325,000, which is the same amount as the nil rate band. Anything above that is not covered by the spouse exemption.

The exemptions only matter for lifetime gifts. They reduce the value of a transfer, and any gift left after exemptions is then treated as a PET or a CLT. Check the tax table: the nil rate band is £325,000, and lifetime CLTs above it are charged at 20%.

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 the amount brought forward. Do the carry forward only if the previous year's exemption was not used up. The amount is not in the ACCA tax table, so learn it.
Small gifts exemption: £250 per recipient per tax year; Not available for a recipient who also receives a gift covered by another exemption such as the annual exemption. Learn this as an either-or rule for each person. The amount is not in the ACCA tax table.
Marriage gifts: Parent £5,000; grandparent or remoter ancestor £2,500; one party to the marriage to the other £2,500; anyone else £1,000; Made in consideration of the marriage. These limits are not in the ACCA tax table, so you must learn them.
Normal expenditure out of income: Exempt if: (1) part of a regular pattern, (2) paid out of income, (3) the donor's usual standard of living is maintained; No monetary cap. You must prove all three conditions.
Spouse or civil partner exemption: Unlimited, but £325,000 where the donor is UK domiciled and the spouse is not; The £325,000 cap equals the nil rate band amount. Check the domicile of both parties before you treat a spouse gift as fully exempt.
Order of deductions: Marriage exemption against the marriage gift first, then the annual exemption in date order (current year, then brought forward), with small gifts given only to recipients who receive nothing else; The marriage exemption is deducted from the marriage gift before the annual exemption is applied to that gift. The annual exemption then covers the remaining gifts in date order. The small gifts exemption cannot be used with another exemption for the same recipient, so give it to recipients who receive nothing else.
CLT lifetime rate: 20% on the excess over the nil rate band of £325,000; The nil rate band and rates come from the tax tables.

How to solve Lifetime Exemptions and Reliefs questions

Use this order for any question that asks you to compute the value of a lifetime transfer after exemptions.

1List each gift with its date, the recipient, and whether the donor is the parent, grandparent, or another person.
2Test for the unlimited exemptions first: spouse or civil partner, qualifying charity, and normal expenditure out of income. Remove gifts that qualify.
3Apply the marriage gift exemption to any gift made in consideration of a marriage, using the correct amount for the donor's relationship.
4Apply the annual exemption to the remaining gifts in date order. Use the current year's £3,000 first, then the unused amount from the previous year.
5Apply the small gifts exemption (£250) only to a recipient who receives no other exempt gift in the year. Do not use it on a person whose gift is already covered by the annual exemption.
6Record any unused annual exemption to carry forward to the following year only.
7Classify what remains as a PET or a CLT and then compute the tax on any CLT using the nil rate band and the 20% lifetime rate.
8State your assumptions and say which conditions you have tested, especially for normal expenditure.

Quickest way: Exemption check in one pass

When to use it: Use this when the question has several gifts in one or two tax years and time is short.

Draw a small table for each tax year: column for the gift date, recipient, and the amount.
Write £3,000 and any brought forward balance at the top.
Cross out spouse, charity and any normal expenditure gifts first.
Deduct the marriage exemption from the marriage gift itself, before any annual exemption is applied to that gift.
Give small gifts exemption to recipients of gifts of £250 or less who receive no other exempt gift.
Use the annual exemption on the remaining gifts in date order, earliest first, until it is used.
Write what is left as the PET or CLT value in the last column.

Common mistakes in Lifetime Exemptions and Reliefs

Carrying forward the annual exemption for more than one year.
Students remember the carry forward but forget it lasts for one tax year only.
Fix: Carry forward only the unused amount from the immediately preceding year. Use it after the current year's exemption.
Using the brought forward annual exemption before the current year's.
It feels natural to use the older amount first.
Fix: The current year's £3,000 is used first. Then use the brought forward amount.
Combining small gifts exemption and the annual exemption on the same recipient.
Both are small amounts and students want to maximise the relief.
Fix: The small gifts exemption cannot be used with another exemption for the same person. Apply it only to a recipient who gets no other exempt gift.
Treating normal expenditure out of income as exempt without testing it.
It has no cap, so students assume it applies automatically.
Fix: State and test all three conditions: regular pattern, paid from income, and standard of living maintained. Gifts from capital fail.
Applying the wrong marriage gift limit.
Students remember £5,000 and apply it to every donor. The limits are not in the tax table, so they must be learned.
Fix: Match the donor to the correct limit: parent £5,000, grandparent or remoter ancestor £2,500, a party to the marriage giving to the other £2,500, anyone else £1,000. Check the gift is made in consideration of the marriage.
Applying the annual exemption to a gift that is already exempt.
The annual exemption is used by habit before other exemptions are tested.
Fix: Remove exempt gifts first so the annual exemption is kept for gifts that need it.

Worked examples

Example 1

Anna makes a gift of £20,000 to her son on 1 July 2025. She made no gifts in 2023/24. Apart from a gift of £1,000 to a friend on 2 May 2024 (2024/25), she made no other gifts in 2024/25 or 2025/26. Compute the value of the 2025/26 gift after exemptions.

Show the solution

2024/25: the £1,000 gift to the friend is covered by the 2024/25 annual exemption of £3,000. This is the current year's exemption, which is used first.
Any 2023/24 balance brought forward into 2024/25 is not needed, because the 2024/25 gift is fully covered by the 2024/25 exemption. Anna made no gifts in 2023/24, so £3,000 was unused then, but it is only available for 2024/25 and now lapses. Nothing from 2023/24 reaches 2025/26.
Unused 2024/25 exemption: £3,000 − £1,000 = £2,000. This carries forward to 2025/26.
For 2025/26, the current year's exemption is £3,000 and is used first. Brought forward £2,000 is used next.
Total exemption available is £3,000 + £2,000 = £5,000.
Value of transfer after exemptions: £20,000 − £5,000 = £15,000.

Answer: The value of the 2025/26 gift after exemptions is £15,000. It is a PET because it is a gift to an individual.

Example 2

Raj, a father, gives £8,000 to his daughter on her marriage in November 2025. In the same tax year (2025/26) he gives £200 each to three friends at Christmas 2025, and £5,000 to his nephew in February 2026. He has no unused annual exemption from last year. Compute the value of each gift after exemptions.

Show the solution

Marriage exemption first, against the marriage gift: the parent limit is £5,000. The daughter's gift is £8,000 − £5,000 = £3,000 remaining.
Small gifts exemption: each friend receives £200, which is not more than £250. They receive no other exempt gift, so each gift is exempt under the small gifts exemption and does not use the annual exemption.
Annual exemption of £3,000 for 2025/26 is then applied to the remaining gifts in date order. The earliest is the £3,000 left on the daughter's gift (November 2025). The annual exemption covers it fully, leaving £0 and using up the whole £3,000. You cannot hold it back for a later gift.
Nephew's gift of £5,000 (February 2026): no annual exemption is left and the small gifts exemption does not apply because the gift exceeds £250. It stays at £5,000 and is a PET.

Answer: Daughter: £0 left (£5,000 marriage exemption plus £3,000 annual exemption). Friends: £0 left on each gift (small gifts exemption). Nephew: £5,000, which is a PET.

Exam tips

Show every exemption as a separate line so the marker can give credit for each one.
For normal expenditure out of income, quote all three conditions and say whether the facts meet them. The tax table does not give these conditions.
Write the date of each gift. The order of the annual exemption depends on it.
State when the carry forward is lost. A one-line note picks up easy marks.
Link your answer to the next step: after exemptions, say whether the gift is a PET or a CLT and what that means for tax.

Practice questions from Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death

Lifetime Exemptions and Reliefs: frequently asked questions

How much is the IHT annual exemption and can I carry it forward?

The annual exemption is £3,000 per tax year. If you do not use all of it, the unused part carries forward to the next tax year only. You use the current year's exemption first, then the brought forward amount.

What are the IHT marriage gift exemption limits?

A parent can give £5,000, a grandparent or remoter ancestor £2,500, and anyone else £1,000. A gift from one party to the marriage to the other is £2,500. The gift must be made in consideration of the marriage.

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

The gift must be part of a regular pattern, be paid out of income rather than capital, and leave you with enough income to maintain your usual standard of living. All three must be met. There is no limit on the amount.

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

No. The small gifts exemption of £250 per recipient cannot be used with another exemption for the same person. You can use it for a person who receives no other exempt gift in the tax year.