Key Takeaways

• The £3,000 Annual Exemption: This is your primary tool. It’s a “use it or lose it” allowance each tax year, but you can carry forward one year of unused allowance—potentially allowing a couple to gift £12,000 tax-free immediately.
• Normal Expenditure out of Income: This “hidden gem” of the tax code has no monetary cap. If you have surplus income (pensions, dividends, or salary), you can gift it regularly without it ever entering your estate for IHT purposes.
• The 7-Year Rule (PETs): Larger, one-off gifts are “Potentially Exempt Transfers.” They only fall entirely out of your estate if you survive for seven years, making February 2026 the perfect time to “start the clock.”
• Worcester Market Impact: With the average detached home in Malvern now fetching over £470,000 and semi-detached properties around £298,000, many local families are crossing the £325,000 Nil-Rate Band threshold purely through their property value.

The Foundation: Maximising the £3,000 Annual Exemption

The Annual Exemption is the simplest way to reduce your estate. You can give away a total of £3,000 each tax year, and it is immediately exempt from IHT.

Use the “Carry Forward” Rule

If you didn’t use your full £3,000 allowance in the 2024/25 tax year, you can carry it forward into 2025/26.

• The Calculation: If you made no gifts last year, you could gift £6,000 today.
• For Couples: A married couple or civil partners could combine their allowances to gift a total of £12,000 tax-free before April 5th.
• Important: You must use the current year’s allowance first before you can use the carried-forward amount.

The “No-Limit” Exemption: Normal Expenditure out of Income

While most people focus on lump sums, the “Normal Expenditure out of Income” rule is arguably the most powerful tool for high earners or those with generous pensions.

The Criteria for HMRC

For a gift to qualify for this unlimited exemption, it must meet three strict tests:

1. It must be regular: Think monthly or annual payments (e.g., paying a grandchild’s school fees or a regular savings contribution).
2. It must come from income: It must be funded by your net income (salary, dividends, interest, or pension), not by dipping into your capital or savings.
3. Standard of Living: You must be able to maintain your “normal” lifestyle after making the gift.

3. The 7-Year Rule: Starting the “PET” Clock

Gifts that exceed your annual allowances are known as Potentially Exempt Transfers (PETs). These are “potentially” exempt because their tax status depends entirely on your survival.

How Taper Relief Works in 2026

If you die within seven years of making a large gift, the IHT rate on the amount above your Nil-Rate Band (currently £325,000) is reduced on a sliding scale:

Note: Taper relief only applies to the tax payable on the gift itself if it exceeds the Nil-Rate Band, not to the tax on the rest of your estate.

Why Worcester Families Face a Unique Challenge

The “IHT trap” is real in Worcestershire. The average detached house price in Malvern (WR14) is now approximately £479,000. For a single person, that property alone exceeds the standard £325,000 Nil-Rate Band by £154,000, creating a potential tax bill of over £61,000 before even considering savings, cars, or investments.

By utilizing the “Residence Nil-Rate Band” (an extra £175,000 if you leave your home to direct descendants) and the gifting strategies above, most local families can mitigate this, but it requires proactive documentation.