Definition
The small gifts exemption allows you to give up to £250 to unlimited recipients each tax year without inheritance tax, provided you haven't used another exemption for the same person.
This exemption is particularly valuable for people with large families who want to make regular gifts to multiple recipients—like birthday and Christmas presents—without creating potential inheritance tax liability.
What Does Small Gifts Exemption Mean?
Under Section 20 of the Inheritance Tax Act 1984, you can make outright lifetime gifts of up to £250 to as many different people as you like each tax year (6 April to 5 April), and these gifts are immediately exempt from inheritance tax. Unlike potentially exempt transfers (PETs), which require you to survive seven years for the exemption to apply fully, the small gifts exemption provides immediate exemption with no survival requirement. The exemption only applies to outright gifts between individuals—you cannot use it for gifts into most trusts, though gifts into absolute trusts for minors do qualify.
However, this exemption comes with strict limitations. The critical rule is that you cannot combine the small gifts exemption with any other inheritance tax exemption for the same person in the same tax year. If you use your annual exemption (£3,000) or any part of it for someone, you cannot also give them £250 under the small gifts exemption. Sarah could give her daughter Emma £3,000 using her annual exemption for a house deposit, but she cannot then give Emma an additional £250 birthday gift under the small gifts exemption in the same tax year. However, Sarah could give her son James £250 under the small gifts exemption because she hasn't used any other exemption for him.
The exemption also operates on an "all-or-nothing" basis. If your total gifts to any one person in a tax year exceed £250, you lose the entire exemption for that person—not just the excess over £250. According to HMRC guidance (IHTM14180), "if the gifts to any one donee in the same tax year exceed £250, the exemption is wholly lost in relation to that donee." For example, David gives his nephew £180 in August 2024 and then £120 in December 2024. Although these are in different calendar years, they're in the same tax year (6 April 2024 to 5 April 2025), totaling £300. Because this exceeds £250, David loses the entire small gifts exemption for his nephew, and the full £300 becomes a potentially exempt transfer—not just the £50 excess.
The strategic value of this exemption becomes clear when you have multiple recipients. Margaret has five grandchildren and gives each of them £250 every year (£1,250 total annually). Over ten years, she removes £12,500 from her estate completely tax-free with no seven-year survival requirement. She separately uses her £3,000 annual exemption for her daughter, meaning she reduces her estate by £4,250 each year through exempt gifts alone. For couples, the effect doubles: Robert and Patricia each give £250 to their eight grandchildren (£4,000 combined) while using their separate annual exemptions for their children, removing £10,000 from their combined estates annually.
The exemption cannot be carried forward like the annual exemption's one-year carryover. If you don't use it in a particular tax year, you lose it. You also don't need to report these gifts to HMRC or keep formal records, though documenting them is wise for estate planning purposes to demonstrate they qualified for exemption.
Common Questions
"Can I give my grandson £250 for his birthday and another £250 for Christmas in the same year?"
No. These gifts would total £500 in the same tax year (6 April to 5 April), exceeding the £250 limit. Once you exceed £250 to one person in a tax year, you lose the entire exemption for that person, and all gifts to them become chargeable transfers. You could give £250 in one tax year and £250 in the next (for example, birthday in March 2025 and Christmas in December 2025).
"I have eight grandchildren—can I give £250 to each of them every year tax-free?"
Yes, absolutely. The small gifts exemption has no limit on the number of recipients, only a £250-per-person limit. You could give £250 to each grandchild annually (£2,000 total) and all gifts would be immediately exempt from inheritance tax with no seven-year survival requirement. This is an effective way to reduce your estate while benefiting family.
"Can I give my daughter £3,000 using my annual exemption and also give her £250 under the small gifts exemption?"
No, you cannot combine these exemptions for the same person in the same tax year. If you use your annual exemption (or any part of it) for someone, the small gifts exemption cannot also apply to them. However, you could give your daughter £3,000 using your annual exemption and give £250 each to other family members under the small gifts exemption.
Common Misconceptions
Myth: If I give someone £300, only the extra £50 over £250 will be subject to inheritance tax.
Reality: This is incorrect. The small gifts exemption operates on an "all-or-nothing" basis under Section 20 IHTA 1984. If your total gifts to one person in a tax year exceed £250, you lose the entire exemption for that person—the full £300 becomes a potentially exempt transfer, not just the £50 excess. HMRC explicitly states the exemption is "wholly lost" if the threshold is exceeded.
Myth: I can give £250 to someone and also use my £3,000 annual exemption for them, making a total tax-free gift of £3,250.
Reality: You cannot combine the small gifts exemption with any other exemption for the same person in the same tax year. HMRC guidance states you cannot make "an IHT free gift of £3,250" by combining exemptions. You must choose which exemption to use for each recipient, though you can use the annual exemption for some people and small gifts exemption for different people.
Related Terms
Understanding small gifts exemption connects to these related concepts:
- Inheritance Tax (IHT): The small gifts exemption is one of several statutory exemptions that help reduce IHT liability on your estate.
- Annual Exemption: A separate £3,000 exemption that cannot be combined with small gifts exemption for the same person.
- Lifetime Gift: The small gifts exemption only applies to gifts made during your lifetime, not testamentary gifts in your will.
- Potentially Exempt Transfer (PET): When gifts exceed £250 and lose the exemption, they typically become PETs requiring seven-year survival.
- Gifts out of Normal Expenditure: An alternative exemption for regular gifts from income that can cover amounts larger than £250.
Related Articles
- How to Reduce Your Inheritance Tax Bill: Comprehensive strategies including how the small gifts exemption fits into broader IHT planning.
- Understanding Gift Exemptions and Allowances: Detailed comparison of all IHT gift exemptions and when to use each one strategically.
- Estate Planning for Grandparents: How grandparents can use the small gifts exemption effectively with multiple grandchildren.
- Lifetime Gifting Strategies to Reduce Your Estate: Coordinating multiple exemptions to maximize tax-free wealth transfer.
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Understanding inheritance tax exemptions like the small gifts exemption is essential for effective estate planning. Strategic use of lifetime gifts can significantly reduce your estate's IHT liability while supporting your family during your lifetime.
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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified solicitor or tax adviser. Tax rules and exemptions are subject to change. The information provided reflects the law as of October 2025.