How does the 7-year rule on gifts work?
Short answer
Survive seven years from the date of a gift and it escapes inheritance tax entirely. Die sooner and it is pulled back into the calculation, using up your £325,000 nil-rate band first. Taper relief from year three reduces the tax, not the value of the gift.
An outright gift to another person is a potentially exempt transfer under section 3A of the Inheritance Tax Act 1984. Nothing is payable or reportable when you make it. What happens next depends entirely on how long you live.
Failed gifts and the order they are counted
Survive seven years and the gift leaves your estate permanently. Die within seven and it fails, and is brought back into the calculation before the death estate, earliest gift first. Each failed gift consumes a slice of the £325,000 nil-rate band, and only once the band is exhausted does tax arise — first on the excess gifts, then at 40% on an estate that now has little or no band left. This is why a large gift six years before death can itself be tax-free while pushing the entire estate into charge.
Taper relief then reduces the tax on any failed gift according to survival: 20% off at three to four years, 40% at four to five, 60% at five to six, and 80% at six to seven. The critical point is that it reduces the tax, never the value of the gift. If your gifts sit within the nil-rate band there is no tax to taper, so taper relief does nothing at all — while the band is still used up.
Who pays, and what never counts
Where tax falls due on a failed gift, the recipient is primarily liable — even if they spent the money years ago. If they do not pay within twelve months of the end of the month of death, liability can fall back on the estate. Executors must report gifts from the previous seven years on schedule IHT403, so warn beneficiaries of large gifts early.
Several gifts never enter the calculation at all: the £3,000 annual exemption, with one year's unused allowance carried forward; £250 small gifts per person per year; wedding gifts of £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else; unlimited gifts to a spouse or civil partner and to charities; and regular gifts out of surplus income that leave your standard of living unaffected.
Two traps. Giving away your home but continuing to live in it rent-free is a gift with reservation of benefit — the clock never starts and the house stays in your estate. And gifts into most trusts are chargeable lifetime transfers rather than PETs, with an immediate 20% charge above the band. Keep a dated gift register: your executors have to prove all of this without you.
Related guides
The 7-Year Rule for Gifts and Inheritance Tax
Give money or assets away and survive seven years, and the gift escapes inheritance tax entirely. Die within seven years, and the gift is pulled back into the IHT calculation — with a sliding scale of "taper relief" softening the tax from year three onwards. The rule is widely known but widely misunderstood: taper relief reduces the tax, not the gift, and it only helps at all once your gifts exceed the nil-rate band. This guide explains how the 7-year clock works, who actually pays any tax due, and which gifts never enter the calculation in the first place.
9 min
Inheritance Tax Basics
Inheritance tax (IHT) is charged at 40% on the value of an estate above the nil-rate band threshold. With careful planning — using available exemptions, reliefs, and lifetime gifting — many families can significantly reduce or eliminate their IHT liability. This guide explains the key rules and the main planning opportunities available.
11 min
Deed of Variation: Changing a Will After Death
A deed of variation allows beneficiaries of an estate to redirect their inheritance — to other family members, to charity, or to skip a generation — within two years of the deceased's death. When made correctly, the variation is treated as if the deceased had made it themselves for inheritance tax and capital gains tax purposes.
8 min
Making a Will
A will is the only way to ensure your assets go to the people you choose after your death. Without a valid will, the intestacy rules determine who inherits — and these may produce very different results from your wishes, particularly if you are unmarried, have stepchildren, or have a complex family situation. Making a will is one of the most important legal steps you can take.
11 min
More wills questions
Disclaimer