Gifting Money to Children: The £3,000 Rule and Gifts Out of Normal Income

There is no tax to pay at the moment you give money to a child, and the child pays no Inheritance Tax or Income Tax on receiving it. The question that matters is whether the gift still counts as part of your estate if you die within seven years — and that depends on whether it fits an exemption such as the £3,000 annual exemption or the "gifts out of normal expenditure" rule.

This guide looks at gifting from the giver's side: which gifts leave your estate immediately, which ones sit on a seven-year clock, and what records you need to leave behind so your executors can prove it.

Key points

• Every person can give away £3,000 a year free of Inheritance Tax under the annual exemption, and can carry forward one unused year, so up to £6,000 in a single year.
• Separate exemptions cover small gifts of £250 per person and wedding gifts of up to £5,000 from a parent.
• Regular gifts made from surplus income — not capital — can be unlimited and immediately exempt, but only if you document them.
• Anything larger is a potentially exempt transfer: it drops out of your estate after seven years, with taper relief on the tax only where the gift exceeds the £325,000 nil-rate band.
• Inheritance Tax is 40% and is UK-wide, so the rules are identical in Scotland, Wales and Northern Ireland.

The £3,000 annual exemption

Each tax year you can give away a total of £3,000 without it ever being counted as part of your estate. It is per giver, not per child, so a couple can give £6,000 a year between them, and it can be split across as many children as you like.

If you do not use the full £3,000 in one year, you can carry the unused part forward for one tax year only. You must use the current year's exemption first, then the leftover from the year before. So a parent who gave nothing in 2025/26 can give £6,000 in 2026/27; a couple in that position can give £12,000. There is no way to stack up several years of unused allowance.

The annual exemption also mops up the first slice of a bigger gift. Give a child £20,000 with £6,000 of exemption available and £14,000 is treated as a potentially exempt transfer, not the full £20,000.

Small gifts of £250

You can give up to £250 to as many different people as you like in a tax year, and each of those gifts is exempt. Birthday and Christmas money for children, grandchildren, nieces and nephews usually falls here.

The catch is that it is all or nothing per person. If you give one child £400, you cannot claim £250 of it as a small gift — the exemption is lost entirely for that person and the whole £400 has to come out of your annual exemption or sit on the seven-year clock. You also cannot combine the small gifts exemption with the £3,000 annual exemption for the same person in the same year.

Wedding and civil partnership gifts

Gifts made in consideration of a marriage or civil partnership have their own exemption, on top of the annual exemption. The limits depend on your relationship to the couple:

The gift must be made before the wedding and the wedding must actually take place. A parent can therefore give a child £5,000 as a wedding gift plus £3,000 under the annual exemption in the same tax year, and both are immediately outside the estate. Two parents doing the same thing put £16,000 beyond Inheritance Tax in one go.

Gifts out of normal income

This is the most valuable and most under-used exemption, because there is no cash limit. Regular gifts paid out of your income are exempt straight away — no seven-year wait — provided all three of these conditions are met:

1. The gift forms part of your normal expenditure. It needs a pattern: a standing order, an annual payment, school fees paid each term, or a written intention to keep giving.
2. It is made out of income, not capital. Income means pensions, salary, dividends, rent, savings interest. Selling shares or dipping into a deposit account balance is capital.
3. You are left with enough income to maintain your usual standard of living. You cannot fund gifts from income and then live off savings.

A retired parent with £45,000 of pension and dividend income who spends £30,000 a year and pays £1,000 a month into a child's account is squarely within the exemption. The full £12,000 a year leaves the estate immediately, however long they live afterwards.

The burden of proof falls on your executors after your death, using the gifts schedule to the Inheritance Tax return (form IHT403). They will be asked for a year-by-year summary of your income, your expenditure and your gifts. Keeping a simple annual record of those three numbers, plus a dated note of what you intended to give and why, is what turns this from an argument into a claim that is accepted.

Large gifts and the seven-year rule

Anything that does not fit an exemption is a potentially exempt transfer (PET). Nothing is payable when you make it. If you survive seven years, it is completely outside your estate. If you die within seven years, the gift is added back and uses up your nil-rate band before the rest of your estate does.

The bands for 2026/27 are a nil-rate band of £325,000, a residence nil-rate band of £175,000 where a home passes to direct descendants, and a rate of 40% on the excess. A widow or widower can usually also claim their late spouse's unused bands.

Taper relief only helps large gifts

Taper relief reduces the tax on a failed gift once you have survived three years:

The trap is that taper relief reduces the tax on the gift. If the gift is smaller than your available nil-rate band, there is no tax on the gift to reduce — the cost lands on the estate instead, which has less nil-rate band left to use.

Worked example: giving a son £100,000

A widowed parent gives their son £100,000 in June 2026. No gifts were made in 2025/26, so £3,000 of carried-forward exemption plus the £3,000 for 2026/27 apply:

• Exempt: £6,000
• Potentially exempt transfer: £94,000

They die four and a half years later, leaving an estate of £500,000 including a home left to their son. The gift is within seven years, so it is brought back in first:

• Gift of £94,000 set against the £325,000 nil-rate band — no tax on the gift, so taper relief is irrelevant.
• Nil-rate band left for the estate: £325,000 − £94,000 = £231,000
• Residence nil-rate band: £175,000
• Taxable estate: £500,000 − £231,000 − £175,000 = £94,000
• Inheritance Tax at 40% = £37,600

Had no gift been made, the estate would have been £600,000: £600,000 − £325,000 − £175,000 = £100,000 taxable, so £40,000 of tax. The gift saved £2,400 — exactly 40% of the £6,000 that was covered by exemptions. If the parent had survived seven years instead, the whole £94,000 would fall away and the £500,000 estate would be fully covered by the two bands, saving the full £40,000.

Worked example: a gift bigger than the nil-rate band

A parent gives £400,000 to a child and dies five and a half years later, with £3,000 of annual exemption available.

• Potentially exempt transfer: £397,000
• Less nil-rate band £325,000 = £72,000 chargeable
• Tax at 40% = £28,800
• Taper relief at 60% (5 to 6 years) reduces it to £11,520

That £11,520 is payable by the person who received the gift, not by the estate — a point worth telling the recipient at the time. The estate itself then has no nil-rate band left, although the residence nil-rate band may still be available.

Traps that catch givers out

• Keeping a benefit. Giving a child a share of the house while continuing to live in it rent-free is a gift with reservation of benefit — the property stays in your estate regardless of how long you live.
• Gifts to minor children. If you give money to your own child under 18 and it generates more than £100 of income a year, that income is taxed as yours, not the child's. Junior ISAs and Child Trust Funds are outside this rule.
• Gifting assets rather than cash. Handing over shares, a second property or a rental flat is a disposal for Capital Gains Tax at market value, even though no money changes hands. In 2026/27 the annual exempt amount is £3,000 and residential property gains are taxed at 18% or 24%.
• The estate size test for the residence nil-rate band. It tapers away once the estate exceeds £2m, which is one reason lifetime giving can matter more for larger estates.
• Loans that are really gifts. If you lend a child money for a deposit, keep a signed note. An outstanding loan is an asset of your estate; a forgiven loan is a gift on the date you waive it.

Records to keep

Executors have to declare gifts made in the seven years before death. Make their job easy with a single running list showing, for each gift: the date, the amount, who received it, and which exemption you are relying on. If you are claiming gifts out of normal expenditure, add your total income and total living costs for the year alongside it.

Inheritance Tax has no devolved variations, so the £3,000 exemption, the seven-year rule and the 40% rate apply in exactly the same way whether you live in Edinburgh, Cardiff, Belfast or Exeter. Only the Income Tax and Capital Gains Tax consequences of what you gift can differ by where you live, and Scottish rates apply to non-savings income only.

Two changes worth watching if farm or business assets are part of your plan: from 6 April 2026 the 100% rates of Agricultural and Business Property Relief are being restricted to a combined £1m per person, with 50% relief above that, and unused pension funds are expected to come within Inheritance Tax from 6 April 2027.

What to do next

Work out whether your estate is likely to face Inheritance Tax at all before you start reorganising your finances — many are fully covered by the £325,000 nil-rate band, the £175,000 residence nil-rate band and a transferred spouse's allowance. Run the numbers with the Inheritance Tax calculator, then test what happens if you remove regular gifts from the estate figure. Official guidance on exemptions and the seven-year rule is at GOV.UK.