The annual £3,000 allowance that allows individuals to pass on gifts free of inheritance tax has lost 78% of its value since it was introduced in 1981, says TWM Solicitors, a leading private wealth and family law firm.
The allowance has remained unchanged despite cumulative inflation of 354%. Had it kept pace with inflation, it would now stand at around £13,600.
Duncan Mitchell-Innes says there are no signs that the Government will adjust the allowance to reflect inflation, meaning the process known as ‘fiscal drag’ will continue to reduce the value of this tax break. This occurs when tax thresholds do not rise with inflation.
Duncan Mitchell-Innes says: “The tax-free gift allowance was designed to let people give meaningful gifts to their loved ones without leaving them facing a tax bill on death. Today, it is becoming increasingly insignificant.
“By freezing the allowance, what the Government is really doing is hiding a tax increase – a classic ‘stealth tax’.”
Once enough for a house deposit, now just enough to replace a boiler
Duncan Mitchell-Innes says the kind of gifts that families could pass on tax free in 1981 compared with today shows how much they have lost to the ‘stealth tax’.
Duncan Mitchell-Innes says: “In 1981, families could gift enough for a house deposit or even a brand-new Mini tax free. Today, the same allowance barely covers the cost of replacing an average boiler.”
What £3,000 was worth in 1981 – compared to today:
- Around 16% of the average UK house price in 1981, compared with 1%* today.
- Around five months’ salary for the average UK male and almost eight months for the average UK female in 1981, compared to only a month today**.
- Enough to buy a Mini Metro in 1981***, compared with the cost of replacing an average boiler today****.
The stealth tax increases the already heavy compliance burden when filing an IHT return
As the real value of the allowance falls, families must track increasingly smaller gifts over the seven-year period before death. This adds to the administrative burden at an already difficult time.
Mitchell-Innes explains: “With the gift allowance threshold effectively falling every year, families need to trace and document increasingly smaller gifts. A £3,000 gift today is nothing like it was in 1981 – it could be as ordinary as a few months’ rent.
“This adds an administrative burden on families at an already difficult time. They already face heavy compliance when they lose a loved one and need to submit an IHT return.
“With much more pressing issues like valuing the property they inherit, a £3,000 gift can easily be missed and result in an HMRC penalty.”
In addition to the £3,000 annual allowance, gifts made within an individual’s lifetime are exempt from inheritance tax if that individual survives seven years after making the gift. Individuals can also make ‘gifts out of surplus income’.
* Source: Land Registry According to the Land Registry, the average price for UK properties was 19,288 vs £271,000 in 2025.
** Source: ONS data
*** BBC: https://www.bbc.co.uk/news/uk-england-birmingham-54423328
**** Source: British Gas
