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The £3,000 Inheritance Tax annual exemption: one year carried forward, then lost, with a three-year gift table
HMRC's manual gives each person £3,000 of exempt gifts a tax year, with the unused part carried forward one year only. Two client gift histories, worked.
A client says: "I have given the children a few lump sums over the last three years. Were they covered by the £3,000 allowance?" The answer depends on the order the allowance is used in, and on a rule that is easy to forget: an unused allowance moves forward once, then it is gone.
What the HMRC manual says
As summarised from the two manual pages on 27 October 2026:
- The amount. Lifetime transfers are exempt up to a total of £3,000 in an income tax year, which runs from 6 April to 5 April.
- The excess. A gift above the available exemption is the chargeable amount of a potentially exempt transfer, or of an immediately chargeable transfer if it is not one.
- Carry forward. Any part of the exemption not used in a tax year can be carried forward to the next tax year only.
- Order of use. The current year's exemption is used first, then any balance brought forward from the previous year. Anything older is not available.
- Lost for good. The manual's own example shows a balance carried forward that is not needed in the following year being lost.
Two gift histories, worked
Both clients are shown with the tax years 2024/25, 2025/26 and 2026/27 (the current year, from 6 April 2026).
History A: gifts of £1,000, £5,000 and £4,500.
| Tax year | Gift | Current year used | Brought forward used | Exempt | Chargeable | Carried to next year |
|---|---|---|---|---|---|---|
| 2024/25 | £1,000 | £1,000 | £0 | £1,000 | £0 | £2,000 |
| 2025/26 | £5,000 | £3,000 | £2,000 | £5,000 | £0 | £0 |
| 2026/27 | £4,500 | £3,000 | £0 | £3,000 | £1,500 | £0 |
History B: nothing, then £1,000, then £8,000.
AI staff and workflows for high-street solicitors. Starting with conveyancing client updates.See what we would set up| Tax year | Gift | Current year used | Brought forward used | Exempt | Chargeable | Carried to next year |
|---|---|---|---|---|---|---|
| 2024/25 | £0 | £0 | £0 | £0 | £0 | £3,000 |
| 2025/26 | £1,000 | £1,000 | £0 | £1,000 | £0 | £2,000 |
| 2026/27 | £8,000 | £3,000 | £2,000 | £5,000 | £3,000 | £0 |
Checks. History A: 3,000 minus 1,000 is 2,000 carried; in 2025/26, 3,000 plus 2,000 is 5,000, which equals the gift, so nothing is chargeable and nothing is carried; in 2026/27, 4,500 minus 3,000 is 1,500. History B: the £3,000 carried from 2024/25 is not needed in 2025/26 because the current year covers the £1,000 gift, so it is lost; the unused part of 2025/26 is 3,000 minus 1,000, which is 2,000; in 2026/27, 3,000 plus 2,000 is 5,000, and 8,000 minus 5,000 is 3,000.
The final row of each table is a chargeable amount, not a bill. A potentially exempt transfer usually matters only if the donor dies within seven years, and the seven-year rule and taper relief guide shows how. As an upper figure, 40 per cent of £3,000 is £1,200, but the nil-rate band and earlier gifts can mean no tax is due at all.
What I did not read
I did not read the manual page on married couples, the order of gifts made on the same day, the small-gifts, wedding-gift or normal-expenditure exemptions, or how the allowance interacts with business or agricultural relief. IHTM14141 itself said nothing on those points, so check each against a primary source before you advise.
Putting it into practice
- Ask for the dates. Gifts are matched to the tax year in which they were made, so a list with dates and amounts is the first thing to collect. The client care letter checklist can carry the request.
- Keep the record. The executors will need it later. The estate accounts template and the spouse threshold transfer guide show where gift history feeds into the estate paperwork.
- Use the allowance early. A gift made in the year, however small, uses the current allowance first and lets the brought-forward amount survive for one more year.
Overlyft builds AI staff who join your firm's team, read a client's list of gifts, apply the current-year-first rule, produce the table for each tax year and draft the note for the file, with a person approving each one.
This is general information, not legal advice. Check the current legislation and your own obligations for each client.
Where this comes from: HMRC Inheritance Tax Manual IHTM14141, "Lifetime transfers: annual exemption: summary" (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14141) and IHTM14144, "Lifetime transfers: annual exemption: roll over provisions" (https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14144). Both pages were fetched through a summarising tool, not read line by line. Read 27 October 2026.
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