Annual Exemption (£3,000)

Key facts

You can give away £3,000 per tax year free of IHT — the annual exemption.
If you did not use the previous year’s exemption, you can carry it forward one year (giving up to £6,000).
The exemption applies to the donor, not to each recipient.
It is applied after other specific exemptions (small gifts, wedding gifts, etc.).
The annual exemption has been £3,000 since 1981 and has never been increased.

What Is the Annual Exemption?

The annual exemption is a straightforward IHT allowance: each individual can give away up to £3,000 per tax year (6 April to 5 April) without the gifts being subject to Inheritance Tax. The exemption applies immediately — there is no need to survive 7 years.^[1]

The £3,000 is a per-donor limit, not per-recipient. You can give it all to one person or spread it among several people.

Carrying Forward Unused Exemption

If you do not use all of your annual exemption in a tax year, the unused amount can be carried forward to the next tax year only. This means:^[2]

Maximum exemption in any year: £6,000 (£3,000 current year + £3,000 brought forward)
You must use the current year’s exemption first
Unused amounts cannot be carried forward more than one year
If you make no gifts this year, you can carry forward £3,000 to next year — but if you still do not use it, it is lost

Example: In 2024/25, you make no gifts. In 2025/26, you give £5,000 to your daughter. The first £3,000 uses your 2025/26 exemption. The next £2,000 uses your carried-forward 2024/25 exemption. Only the excess of £0 is a potentially exempt transfer. The entire £5,000 is exempt.

How the Annual Exemption Is Applied

The annual exemption is applied to gifts in chronological order during the tax year. It is applied after any specific exemptions that may apply to a particular gift (such as the small gifts exemption or wedding gift exemption).^[2]

This means:

First, check if any specific exemption covers the gift
Then apply the annual exemption to any remaining non-exempt gifts
Any balance above the annual exemption is a PET or CLT

Annual Exemption for Married Couples

Each spouse or civil partner has their own £3,000 annual exemption. A married couple can therefore give away £6,000 per year between them (or £12,000 if both carry forward a previous year’s unused exemption).^[1]

Transfers between spouses are exempt under the separate spouse exemption, so the annual exemption is best used for gifts to children, grandchildren, or other beneficiaries.

Practical Uses

Regular gifts to children: Give £3,000 each year to reduce the estate gradually
Topping up larger gifts: Use the annual exemption to reduce the chargeable value of a larger gift (e.g. a £53,000 gift becomes a £50,000 PET after the exemption)
Trust contributions: Use the exemption to reduce the chargeable value of a CLT
Combined with other exemptions: Use the annual exemption alongside the small gifts exemption and wedding gift exemption for maximum tax-free giving

A Note on History

The annual exemption has been £3,000 since 1981. Unlike most tax thresholds, it has never been increased — not even for inflation. If it had kept pace with RPI, it would be approximately £12,000 today. The frozen exemption means its real value erodes every year.

Frequently Asked Questions

How does the £3,000 annual exemption work?

Each tax year (6 April to 5 April), you can give away up to £3,000 in total without it being subject to IHT. You can give it to one person or split it among several people. The exemption is set against gifts in the order they are made during the year.

Can I carry forward my unused annual exemption?

Yes, but only for one year. If you did not use any of your £3,000 exemption in the previous tax year, you can carry it forward and combine it with the current year’s exemption, giving you up to £6,000. You must use the current year’s exemption first.

Can I use the annual exemption on the same person as the £250 small gifts exemption?

Yes. The annual exemption and the small gifts exemption are separate. However, the £250 small gifts exemption cannot be used to top up a larger gift. If you give someone £3,250, the first £3,000 uses your annual exemption, but the remaining £250 is not covered by the small gifts exemption (it applies only to gifts of £250 or less to a particular person).

Does the annual exemption apply to gifts into trust?

Yes. The annual exemption can be set against any type of transfer, including gifts into trust (CLTs). This can reduce or eliminate the immediate lifetime charge.

Sources

Inheritance Tax: gifts — GOV.UK
IHTM14141 – Annual exemption — HMRC