Wills and Probate
TL;DR
Gifting assets during your lifetime is one of the most effective ways to reduce a UK inheritance tax (IHT) liability. Outright gifts between individuals are potentially exempt transfers (PETs) and become fully exempt after seven years. Annual exemptions of £3,000 per year, small gift allowances and gifts from surplus income are immediately exempt with no seven-year period. Trusts can be used to hold assets outside the estate while providing ongoing benefit to family members, but most discretionary trusts now carry periodic IHT charges of their own.
Key facts (2026)
- Potentially Exempt Transfers (PETs) are outright gifts between individuals; they become fully exempt from IHT after the donor survives seven years from the date of the gift (Inheritance Tax Act 1984, Section 3A).
- Taper relief reduces the IHT charge on PETs where the donor dies between three and seven years after the gift: 20 percent reduction at three to four years, 40 percent at four to five years, 60 percent at five to six years, and 80 percent at six to seven years (HMRC IHT taper relief, 2025/26).
- The annual gifting exemption allows each individual to gift up to £3,000 per tax year without IHT, with unused allowance carried forward one year; the small gifts exemption allows gifts of up to £250 per recipient per year to any number of individuals (HMRC gifting exemptions 2025/26).
- Gifts from normal expenditure out of surplus income are immediately exempt with no value limit, provided they are regular, made from income (not capital), and do not reduce the donor's standard of living (HMRC IHTM14250 guidance).
- Discretionary trusts established after 22 March 2006 are relevant property trusts subject to an IHT entry charge (20 percent on value above the nil-rate band at creation), 10-year anniversary charges (up to 6 percent), and exit charges when assets leave the trust (HMRC trust IHT rules, 2025/26).
Potentially exempt transfers: the seven-year rule in detail
A potentially exempt transfer (PET) is a gift of any amount made outright by one individual to another during their lifetime. On the date of the gift the transfer is potentially exempt - it does not immediately reduce the estate for IHT purposes. If the donor survives seven years from the date of the gift, the transfer becomes fully exempt and drops out of the estate entirely. If the donor dies within seven years, the gift is brought back into the estate and IHT may be charged, reduced by taper relief. The seven-year period runs from the specific date of the gift; precise dating of large gifts is therefore important. PETs can be made to individuals, to bare trusts for minor children (which are treated as direct gifts for IHT purposes), or to absolutely entitled beneficiaries. Gifts to discretionary trusts are not PETs; they are chargeable lifetime transfers (CLTs) that may trigger an immediate IHT charge and reduce the nil-rate band available at death.
Annual exemptions and immediately exempt gifts
Certain gifts are immediately exempt from IHT without the need for the donor to survive any period. The annual exemption allows each individual to give away up to £3,000 per tax year; unused annual exemption can be carried forward one year (but not further). Married couples and civil partners each have their own annual exemption, allowing a combined gift of up to £6,000 per year between them. The small gifts exemption allows outright gifts of up to £250 per recipient per tax year to any number of individuals; this exemption cannot be combined with the annual exemption for the same recipient. Wedding gifts are exempt up to £5,000 from a parent, £2,500 from a grandparent, and £1,000 from anyone else. Gifts to charities, political parties and housing associations are fully exempt. Gifts to spouses and civil partners are fully exempt unless the recipient is not UK-domiciled, in which case a cap applies.
Gifts from normal expenditure out of income
One of the most valuable and underused IHT exemptions is the normal expenditure out of income exemption. Gifts that are: made regularly or habitually; funded from income (not capital); and do not cause a reduction in the donor's standard of living are immediately exempt from IHT with no upper limit. This exemption is particularly powerful for those with pension income or investment income in excess of their needs. A grandparent with surplus pension and investment income of £30,000 per year above their outgoings could make £30,000 of regular gifts annually, all immediately outside the estate. HMRC requires evidence that gifts were from income and were habitual; keeping a simple schedule showing total income, normal expenditure and surplus gifted each year provides the documentation needed to support an executor's claim of this exemption after death.
Discretionary trusts: structure and IHT treatment
A discretionary trust holds assets for the benefit of a class of beneficiaries, with the trustees deciding who benefits and when. The settlor (the person establishing the trust) has no access to the assets once placed in trust; this is the mechanism by which the assets leave the estate. Transfers to a discretionary trust are chargeable lifetime transfers, not PETs. If the value transferred exceeds the nil-rate band (£325,000 in 2025/26) at the time of transfer, an immediate IHT charge of 20 percent applies on the excess. The trust then faces periodic charges at ten-year anniversaries (up to 6 percent of the trust value above the nil-rate band) and exit charges when assets leave the trust. Despite these charges, a discretionary trust can be an effective vehicle for estate planning where the objective is to remove assets from the estate while retaining trustee control over distribution - for example, where beneficiaries are young, have financial difficulties, or where the settlor wants to preserve flexibility about which family members benefit.
Bare trusts for children: a simpler alternative
A bare trust holds assets for a named beneficiary who has an absolute and immediate right to both the capital and the income. Assets placed in a bare trust for a specific child are treated as an outright gift to that child for IHT purposes and are PETs. The assets are legally held by the trustees but beneficially owned by the child from the date of the gift. When the child reaches 18, they are entitled to demand the assets outright. The income generated within a bare trust is taxed in the hands of the beneficiary (the child) using the child's own personal allowance, subject to the parental settlement rule (income from parental gifts above £100 per year is attributed back to the parent for tax purposes). Bare trusts are simpler and less expensive to administer than discretionary trusts and do not carry the periodic IHT charges that apply to discretionary trusts.
Documenting gifts: why the record matters
Proper documentation of gifts made during a lifetime is essential to ensure that executors can claim applicable exemptions when dealing with HMRC after death. For each significant gift, keep: the date the gift was made; a description of what was given (cash amount, asset description, market value at date of gift); the identity of the recipient; the basis on which the gift is claimed as exempt (annual exemption, PET, normal expenditure from income); and, for income gifts, a schedule showing total income, expenditure and surplus for each year. HMRC's Toolkit for personal representatives provides detailed guidance on the records needed to support each type of exemption. Executors who cannot demonstrate the basis of an exemption may find HMRC challenges the claim, resulting in unexpected IHT liability.
Related guides
Frequently asked questions
Can I put my house in trust to avoid IHT?
Placing your primary residence in a discretionary trust is not straightforward and does not automatically remove the value from your estate for IHT. If you continue to live in the property after transferring it, the gift with reservation of benefit rules attribute the property back to your estate regardless of the trust structure. To escape your estate, you would need to pay a full market rent to the trust for your continued occupation, which is rarely practical. Specialist tax advice is essential before any property trust arrangement is considered.
How does taper relief work on a PET?
Taper relief reduces the IHT payable on a PET where the donor dies between three and seven years after the gift. The relief applies to the IHT charge on the gift, not to the value of the gift itself. A gift of £400,000 made five years before death would attract a 60 percent taper reduction on the IHT charge; if the nil-rate band had already been used, the IHT on the £400,000 would be reduced from £160,000 (40 percent) to £64,000. Taper relief does not apply if the gift is within the nil-rate band; it only reduces the tax due, not the gift value included in the estate calculation for the purpose of ordering gifts against the nil-rate band.
Does gifting money to my children affect their benefits?
Potentially. If your child receives means-tested benefits, a significant gift of capital may affect their benefit entitlement by exceeding applicable capital limits. DWP benefit rules treat capital above £16,000 as disqualifying for most means-tested benefits and above £6,000 as reducing the benefit amount. If your child is currently on means-tested benefits, take advice before making a large gift to ensure the capital rules are properly considered. Placing assets in a discretionary trust rather than gifting directly may provide more flexibility in managing the timing and amount of distributions.
Can both spouses use the annual £3,000 gifting exemption?
Yes. Each individual has their own annual exemption of £3,000 per tax year. A married couple or civil partnership can therefore gift £6,000 per year combined using their individual allowances, without using any other exemption. Each person can also carry forward one year's unused allowance, meaning a couple who made no gifts last year could each gift up to £6,000 this year, totalling £12,000 between them. The annual exemption operates independently for each individual.
What is a deed of variation and how does it affect IHT?
A deed of variation allows beneficiaries of an estate to redirect their inheritance to other individuals or charities within two years of the date of death, and the redirection is treated for IHT purposes as if the deceased had made that gift directly. This can allow a family to redirect assets to reduce the overall IHT bill - for example, redirecting to a surviving spouse to use the spouse exemption, or redirecting to charity to access the reduced 36 percent IHT rate. A deed of variation requires the agreement of all affected beneficiaries and must be executed correctly to obtain the IHT benefit.
How we verified this guide
PET rules and taper relief rates were confirmed from the Inheritance Tax Act 1984 and HMRC's IHT manual. Annual exemption and small gift exemption figures were confirmed from HMRC's 2025/26 gifting guidance. Normal expenditure from income exemption rules were cross-referenced with HMRC's IHTM14250 guidance. Discretionary trust IHT periodic charge mechanics were verified from HMRC's trust IHT guidance updated for 2025/26.
Primary sources
- HMRC - IHT: gifts and exemptions
- Inheritance Tax Act 1984 - PET provisions
- HMRC - Trusts and inheritance tax
- MoneyHelper - Inheritance tax and gifting
- Citizens Advice - Inheritance tax guidance
Last reviewed: May 2026.
