You might have heard of the seven-year rule for inheritance tax – by which the donor must outlive a gift by seven years for the gift to be disregarded for inheritance tax because it would have fallen out of the donor’s estate for inheritance tax purposes.
The UK Inheritance Tax (IHT) Small Gift Exemption is one of the quickest ways to reduce the inheritance tax burden on your family. By the small gift exemption, you may make gifts that fall outside your estate immediately.
No need to wait seven years.
This exemption permits you to give up to £250 per person, per tax year to an unlimited number of individuals.
But, if you give a recipient more than £250 in a single tax year, you lose the entire exemption for that person.
Let’s see this in practice.
What is the Small Gift Exemption?
The small gift exemption is set out in section 20 of the Inheritance Tax Act 1984. It permits you to make gifts of up to £250 to any number of individuals within a tax year (6 April to 5 April), with these gifts being immediately exempt from inheritance tax.
The small gift exemption is different from your £3,000 annual gift allowance, by which you have a total block of £3,000 which you may distribute among as many beneficiaries as your heart or purse may bear.
After all is said and done, after claiming all the allowances to which your estate might be entitled, the only means of reducing your family’s inheritance burden is to reduce the amount of the taxable estate.
For families with several children and grandchildren, this exemption can remove substantial amounts from your estate. Take a couple with eight grandchildren; they may gift £4,000 per year using this exemption alone (£250 × 8 grandchildren × 2 parents).
Over twenty years, this amounts to £80,000 removed from their combined estates, representing a potential inheritance tax saving of £32,000.
How Does the Small Gift Exemption Work?
The exemption applies to outright gifts not exceeding £250 in total value to any one individual within a single tax year. The nature of the gift is immaterial; what matters is the value transferred.
Qualifying gifts include:
- Cash transfers or cheques
- Gift vouchers and gift cards
- Physical items (jewellery, electronics, household goods)
- Premium bonds
- Contributions to savings accounts
The £250 limit is an aggregate limit per person per tax year. Multiple gifts to the same person throughout the year must not exceed £250.
The Small Gift Allowance in Use
It is easy to sneer at the small gift allowance, thinking £250 was ‘small potatoes’.
Wait.
Iris and her husband have a four-foot by two-foot photograph in their living room. It was taken at the celebration of the golden wedding anniversary. The image is of them with their 100 descendants.
From the year of their anniversary Iris gave £250 to each of the 100 of her kin in that photo, as did her husband. Over the next ten years, she and her husband gave £50,000 a year to their family. Free of inheritance tax… instantly.
Half a million pounds in gifts free of inheritance tax instantly. Small potatoes? Hardly!
The “All or Nothing” £250 Rule
If you give someone more than £250 in total during a tax year, you lose the entire small gift exemption for that person. You cannot claim the exemption for the first £250 and treat the excess as a potentially exempt transfer.
Example:
Margaret gives her nephew £200 for his birthday in June and £100 for Christmas in December. The total is £300. Because this exceeds the £250 limit, the entire £300 loses the benefit of the small gift exemption and becomes a potentially exempt transfer, subject to the seven-year rule.
Had Margaret kept the total to £250 or below, the entire amount would have been immediately exempt.
Can You Give £250 to Multiple People?
Yes. The power of this exemption lies in the unlimited number of recipients. You may give £250 to as many individuals as you wish in a single tax year.
There is no restriction on the relationship between the donor and the beneficiary – nor are there strictures on their ages or financial circumstances.
Restrictions on the Small Gift Exemption
You cannot use the small gift exemption for someone who has already received any part of your £3,000 annual exemption in the same tax year.
Not combinable for the same pair:
Beena gives £200 as a birthday gift to her niece in April and £1,500 as a wedding gift to the same niece in July in the same tax year.
If the July gift is covered by the wedding exemption (limit met), the April £200 cannot be covered by the small gifts exemption. Beena must either apply part of the £3,000 annual exemption to the April £200 or leave it as part of the wedding-exempt gift (if treating as one gift for the occasion is not possible, use annual exemption).
Combinable across different pairs:
Mary gives £250 each to five grandchildren (the small gift allowance), and gives £3,000 to James, her adult son (covered by annual exemption). This is permissible because the exemptions are applied to different beneficiaries.
What You Can Combine with the Small Gift Exemption
The small gift exemption may be used alongside several other exemptions:
- Normal expenditure out of income (unlimited if it meets the statutory requirements)
- Wedding or civil partnership gifts (£1,000 to £5,000 depending on relationship)
- Gifts for the maintenance of dependent relatives
- Gifts to charities and qualifying political parties
The restriction applies only to combining it with the annual exemption for the same person.
Do Birthday and Christmas Gifts Count Toward the £250 Limit?
Yes. All gifts to the same person within a tax year count toward the £250 limit, regardless of the occasion.
The tax year runs from 6 April to 5 April. A Christmas gift in December 2025 and a birthday gift in May 2026 would fall in different tax years, each with its own £250 allowance.
However, a Christmas gift in December 2025 and a birthday gift in January 2026 would both fall within the 2025/26 tax year and would count toward the same £250 limit.
Example:
You give your godson £150 for Christmas in December 2025. In February 2026, you give him £120 for his birthday. Both gifts fall within the 2025/26 tax year (which runs to 5 April 2026). The total is £270, exceeding the limit and losing the exemption.
Timing your gifts with the tax year in mind can help you maximize the available exemptions.
Record Keeping Requirements
While you do not report small gifts to HMRC during your lifetime, your executors will need to account for lifetime gifts when preparing the inheritance tax paperwork after your death.
Records should include:
- Date of each gift
- Recipient’s name and relationship to you
- Description and value of the gift
- Running total for each person within each tax year
- Note of which exemption you are claiming (small gift, annual exemption, etc.)
A simple spreadsheet or collection of diaries would do. If all else fails, bank statements would be your friend. Our concern is that your executors can demonstrate to HMRC that the gifts qualified for the exemption. Without proper records, your estate might have to pay inheritance tax on these gifts. Ouch.
What Happens If You Give Someone £250 and They Die?
Nothing. The gift was exempt from the moment it was made.
Can You Give £250 in Assets Other Than Cash?
Yes, you can, you even may, but in practice, the hassle of giving anything other than cash would outweigh any benefits especially when you get into the palaver of valuation. Best stick to easily verifiable assets that resemble cash.
If you wish to transfer investments, land and buildings or other substantial assets, £250, would be as fruitful as trying to write the history of the United Kingdom on the back of a postage stamp: therefore consider whether a different exemption structure or approach might be more appropriate for your circumstances.
Who Cannot Benefit from the Small Gift Exemption?
This allowance may only be applied to gifts to individuals.
Conclusion
The small gift exemption is often overlooked but cast your eye back to Iris – your family might not be as large as hers, but over the years, using this gift could make a large dent in your family’s inheritance tax bill.
Remember, there is no restriction on the number of people who may get your largesse, or their relationship to you.