Lifetime gifting is one of the simplest tools in UK Inheritance Tax (IHT) planning, but it only works well when people understand the rules and keep records. The £3,000 annual exemption is a core allowance that many families miss, either by forgetting to use it or by misapplying it.
What the £3,000 annual exemption allows
Each tax year, you can give away up to £3,000 in total and that amount is immediately exempt from IHT. It does not become a potentially exempt transfer that relies on the 7 year rule, it is exempt straight away.
Key points:
- It is £3,000 per person per tax year.
- It is £3,000 total, not £3,000 per recipient.
- If unused, it can be carried forward one tax year only.
A couple can typically gift £6,000 each tax year between them, assuming each has their own allowance available.
How to use it in a simple, repeatable way
1) Set a yearly date. For example, shortly after the new tax year starts, decide your annual gifts and send them.
2) Spread it across recipients if you want. You can split £3,000 between children, grandchildren, or anyone else.
3) Keep a gifting log. Record the date, amount, recipient, and what exemption you are using. This makes the executor’s job much easier.
4) Combine it with other gifting exemptions where appropriate. Some families also use:
- small gifts exemption (£250 per person, conditions apply)
- wedding or civil partnership gifts
- gifts out of surplus income (a separate relief with its own criteria and record keeping)
At this stage, many people find it helpful to review gifting inside a broader plan, because the best results often come from combining gifting, wills, and trust choices.
Example of using carry forward
If you made no gifts using the annual exemption in the previous tax year, you can carry forward that unused allowance for one year.
So in the current tax year, you might gift £6,000 (using £3,000 from the current year plus £3,000 carried forward). You must use the carried forward amount before you use the current year’s exemption.
What the exemption does and does not do
It reduces your estate over time, but it does not automatically remove other complications:
- If you give away too much and later need funds for retirement or care, you cannot assume you can reverse it.
- If you give money to someone who later divorces or has creditor issues, that gift is now part of their financial world.
- If you do not keep records, your executors may struggle to prove what was exempt.
Making the exemption meaningful
£3,000 a year sounds small, but over time it adds up. Over 10 years, that is £30,000 per person, or £60,000 for a couple, removed from the estate using a straightforward rule. For estates that exceed IHT thresholds, that can reduce exposure.
4) 7-Year Rule Inheritance Tax, Planning Timeline and Asset Protection
The “7 year rule” is one of the most talked about concepts in UK Inheritance Tax (IHT), but it is also one of the most misunderstood. The rule is linked to potentially exempt transfers (PETs), which are lifetime gifts that can become IHT free if the donor survives for long enough.
Used properly, it can reduce the taxable value of an estate. Used casually, it can create messy record keeping, unexpected tax outcomes, and family confusion.
What the 7 year rule actually means
If you give assets to an individual (or make certain other transfers) during your lifetime, that gift may be treated as a PET. If you survive for seven years from the date of the gift, the value generally falls outside your estate for IHT.
If you die within seven years, some or all of the gift may be brought back into the IHT calculation.
The planning timeline
At the time of the gift (Year 0)
- Record the amount or asset, the date, and who received it.
- Check whether any exemption applies (annual exemption, small gifts, wedding gifts, surplus income). Exempt gifts may not rely on the 7 year rule at all.
Years 0 to 3
- If death occurs in this period, the gift can become chargeable and may use the nil rate band first.
Years 3 to 7
- Taper relief may reduce the tax due on the gift if death occurs after year 3, but before year 7. Taper relief reduces tax, not the size of the gift.
After 7 years
- The gift is generally outside the estate for IHT.
The big trap, gifts with reservation of benefit
If you “give” an asset away but still benefit from it, it may be treated as still in your estate. A common example is giving a home to children but continuing to live in it rent free. Another is gifting an asset but keeping enjoyment or income in a way that breaks the rules.
This issue alone is why many families get advice before transferring property.
How it links to asset protection and family risk
The 7 year rule is about the donor’s IHT position. It does not automatically protect assets from risks in the recipient’s life, such as divorce, bankruptcy, or poor decision making. Once you gift an asset outright, it is theirs.
For that reason, families often evaluate whether some gifts should be made via trust, or whether the will should include protective structures.
Practical steps for a workable 7 year plan
- Make gifts you can afford without putting pressure on retirement cash flow.
- Use easy exemptions first, then consider larger PETs if appropriate.
- Keep a gifting register, including bank transfers and valuations for non cash assets.
- Review your will after significant gifts.
- Consider insurance in some cases to cover potential tax during the 7 year period (subject to advice).
Key takeaways
- A PET becomes IHT free if you survive 7 years.
- Dying within 7 years can bring the gift back into the IHT calculation.
- Gifts with reservation of benefit can fail.
- The best outcomes come from coordinating gifts with the rest of the estate plan.