Many parents and grandparents would rather help their family now than leave everything in a will. For UK inheritance tax, most of these gifts get a special label: "potentially exempt". This article explains in plain terms what that means, using a fictional family as a guide, and what it means for people who have moved from the UK to the UAE.

Earlier articles in this series explain the "long-term residence" test that replaced domicile in April 2025, and how pensions will be taxed on death from April 2027.

Meet the family (fictional)

Ana, a widow, lives in the UK and has two grown-up children, Ben and Clara. She wants to give them money now. Every name and number below is invented and rounded, for illustration only.

A gift is "potentially" tax-free

When Ana gives money directly to Ben, there is no tax to pay and nothing to report at the time. The gift is treated as tax-free, but only "potentially". It becomes fully tax-free if Ana lives for 7 more years.

A gift into a trust can also be potentially exempt, or it can be a "chargeable lifetime transfer": a gift the tax rules treat as chargeable straight away. Which one it is depends on how the trust is set up. A future article will cover this in detail.

What happens if she dies within 7 years

If Ana dies within 7 years of a gift, the gift is brought back into the picture. It does not automatically mean tax. First, it uses up her tax-free allowance, called the nil-rate band.

The nil-rate band is £325,000. The law keeps it frozen until at least April 2031.

Gifts use the allowance in date order, oldest first. Whatever the gifts use is no longer available for the rest of her estate.

Illustrative example: Ana gives Ben £200,000. A year later she gives Clara £200,000. She dies two years after that. Ben's gift uses £200,000 of the £325,000 allowance. Clara's gift uses the remaining £125,000, and the other £75,000 of it is taxed at 40%: £30,000. Nothing is left of the allowance for Ana's estate.

Taper relief: a smaller bill, not a smaller gift

If a gift is large enough to be taxed in its own right, and Ana lived more than 3 years after making it, the tax on that gift is reduced on a sliding scale:

Two points often catch people out:

• Taper reduces the tax, not the gift. The full value of the gift still uses up the allowance.
• Taper only helps where there is tax on the gift itself. A gift fully covered by the £325,000 allowance has no tax to reduce.

Illustrative example: Suppose Ana had lived 3½ years after Clara's gift. The £30,000 tax on that gift falls to 32% of £75,000: £24,000. Her estate still has no allowance left.

Gifts that are tax-free straight away

Some gifts are free of inheritance tax however soon afterwards the giver dies.

• £3,000 a year. Ana can give away £3,000 in total each tax year (6 April to 5 April). If she does not use it, she can carry it forward one year only.
• Small gifts of up to £250. She can give up to £250 a year to as many different people as she likes, but not to someone who has had another allowance from her.
• Wedding gifts. When Ben marries, Ana can give him up to £5,000. Grandparents can give up to £2,500, and anyone else up to £1,000.
• Regular gifts from spare income. There is no fixed limit if all three tests are met: the gifts are part of a regular pattern, they come from income rather than savings, and Ana can still afford her usual lifestyle afterwards. This is judged on evidence, so records of income and spending matter. There is no fixed rule for when saved income turns into capital.

Giving something away but still using it

Suppose Ana gives her house to Clara but carries on living there rent-free. For tax, the house is treated as still hers when she dies. A gift only counts if the person receiving it really takes it over and the giver stops benefiting from it.

If Ana later stops benefiting, for example by moving out, the 7-year clock starts at that point, not on the date of the original gift. A separate income tax charge can apply in some related situations. It is not covered here.

If you have left the UK: what changed in April 2025

Since 6 April 2025, whether your assets outside the UK are within UK inheritance tax depends on how long you have lived in the UK, not on domicile.

• UK assets, such as a London flat, are within UK inheritance tax wherever you live. Gifts of them follow the rules above.
• Assets outside the UK, such as a Dubai bank account, are outside UK inheritance tax if you are not a "long-term UK resident". A gift of them in that situation is ignored for UK inheritance tax.

The tail. Someone who leaves after many years in the UK can stay a long-term UK resident for 3 to 10 tax years after leaving, depending on how long they lived there. This period is often called the tail. A gift of non-UK assets made during the tail is treated like any other gift above.

Illustrative example: Ana moves to Dubai and remains a long-term UK resident for a further 5 years. In year 2 she gives Ben money from her Dubai account. If she dies in year 4, still within the tail and within 7 years of the gift, the gift is brought back in under the normal rules.

If she instead died after the tail had ended, but still within 7 years of the gift, we have not been able to confirm how the change in her status affects that gift. [UNVERIFIED: do not rely on any reading without individual advice.]

Special transitional rules apply to some people who were not UK domiciled on 30 October 2024. Our earlier article explains them. The UK has no inheritance tax treaty with the UAE, so no treaty changes these rules for UAE residents.

For the detail

• Potentially exempt gifts and the 7-year rule: Inheritance Tax Act 1984 (IHTA) s.3A
• Gifts into trusts: potentially exempt only for the trusts listed in IHTA s.3A(1A) (a disabled person's trust, and a bereaved minor's trust in one narrow case); most other gifts into trust are chargeable transfers under IHTA s.2(1)
• Nil-rate band of £325,000 and its freeze to 2030-31: IHTA Sch 1; Finance Act 2021 s.86, as extended by Finance Act 2026 s.72
• Oldest-first use of the allowance: IHTA s.7(1); HMRC manual IHTM14513
• Taper relief: IHTA s.7(4); GOV.UK, "Rules on giving gifts"
• £3,000 annual exemption: IHTA s.19 · £250 small gifts: s.20 · Wedding gifts: s.22
• Regular gifts from income: IHTA s.21; HMRC manual IHTM14231–IHTM14251
• Gifts you still benefit from: Finance Act 1986 s.102 · Related income tax charge: Finance Act 2004 Sch 15
• Non-UK assets and long-term residence: IHTA ss.3(2), 6(1), 6A; GOV.UK, "Inheritance Tax if you're a long-term UK resident"; HMRC manual IHTM47020
• Transitional rules: Finance Act 2025 Sch 13 para 46 · No UK–UAE treaty: GOV.UK, "United Arab Emirates: tax treaties"

About the author

James Spence, Chartered MCSI, Partner, Family Office and Private Client Adviser.

This article reflects the law as at 1 November 2026 and may change.

This article is general information, not advice. It does not take your personal circumstances into account; seek individual advice before acting.