The 7-Year Rule for Gifts and Inheritance Tax

When you make an outright gift to another person during your lifetime — money, shares, property, anything of value — it is a potentially exempt transfer (PET) under section 3A of the Inheritance Tax Act 1984. No IHT is payable when you make it, and nothing needs to be reported to HMRC at the time.

The gift then sits in one of two futures:

• You survive 7 years from the date of the gift. The PET becomes fully exempt. It leaves your estate permanently and is ignored for IHT.
• You die within 7 years. The PET "fails" and is brought back into the IHT calculation as part of your cumulative total of chargeable transfers.

Failed PETs are counted before the death estate, in the order you made them (earliest first). Each failed gift uses up a slice of your £325,000 nil-rate band. Only once the gifts have exhausted the band does tax arise — first on the excess gifts, then at 40% on the estate itself, which is left with less (or none) of the band to use.

This ordering is why substantial lifetime gifts can create tax bills in unexpected places: a large gift made six years before death may be tax-free itself (covered by the nil-rate band) while pushing the entire death estate into the 40% charge.

Where tax is due on a failed PET, taper relief under section 7(4) IHTA 1984 reduces it according to how long you survived after making the gift:

Worked example: You give your daughter £400,000 and die 5½ years later, having made no other gifts. The first £325,000 is covered by the nil-rate band. Tax on the remaining £75,000 at 40% would be £30,000 — but 5–6 year taper relief cuts it by 60%, to £12,000.

The critical limitation: taper relief reduces the tax, never the value of the gift. If your total gifts in the 7 years are within the nil-rate band, there is no tax on them to reduce — the gifts still consume the band, and taper relief does nothing for the estate. Our 7-year gift taper calculator applies these bands to your own dates and figures.

A point that surprises many families: where IHT falls due on a failed PET, the person who received the gift is primarily liable to pay it. HMRC's guidance puts it simply: tax on gifts is usually paid by the estate, unless the deceased gave away more than £325,000 in the 7 years before death — once gifts exceed the threshold, the recipients of the gifts above it are asked to pay the IHT on what they received.

In practice:

• Gifts are set against the nil-rate band in date order, earliest first.
• Recipients of the earlier gifts (within the band) pay nothing.
• Recipients of gifts above the band pay the tapered tax on their own gift — even if they spent the money years ago.
• If a recipient does not pay within 12 months of the end of the month of death, the personal representatives can become liable out of the estate.

Executors must report gifts made in the 7 years before death on schedule IHT403 when completing the IHT400 account. Beneficiaries who received large gifts should be warned early that a bill may be coming — this is one of the most common sources of family conflict during estate administration.

Several categories of gift are exempt immediately — they never become PETs and are ignored even if you die the next day:

• Annual exemption: £3,000 of gifts per tax year, with one year's unused exemption carried forward (so up to £6,000 in a year).
• Small gifts: up to £250 per recipient per tax year, provided the same person has not also received part of your annual exemption.
• Wedding and civil partnership gifts: £5,000 to your child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
• Spouse or civil partner: unlimited and always exempt (where both are UK-domiciled).
• Charities and political parties: unlimited and always exempt.
• Normal expenditure out of income: regular gifts made from surplus income (not capital) that leave your standard of living unaffected are exempt without limit — a powerful but under-used exemption. Keep records showing the pattern of giving and your income and outgoings.

Everything else — the house deposit for a child, a lump sum to a grandchild, forgiving a loan — is a PET and starts its own 7-year clock on the date it is made.

Gifts with reservation of benefit. The 7-year clock only starts when you genuinely part with the asset. If you give your home to your children but carry on living in it rent-free, the gift is a "gift with reservation of benefit" — the house stays in your estate for IHT no matter how long ago you signed it over. To make such a gift effective you must either pay a full market rent (reviewed regularly) or move out and stop benefiting. This is the single most common DIY planning mistake.

Gifts into most trusts are not PETs. A transfer into a discretionary trust is a chargeable lifetime transfer (CLT): an immediate 20% charge applies to the extent it exceeds the available nil-rate band, and if you die within 7 years extra tax can become due. CLTs also interact badly with later PETs — because a failed PET drags in chargeable transfers from the 7 years before it was made, gifts up to 14 years before death can end up affecting the calculation (the so-called "14-year shadow"). If trusts are involved, take specialist advice before gifting.

Life insurance can bridge the risk in the meantime: a 7-year "gift inter vivos" policy written in trust pays out a reducing sum matching the potential tax if you die during the taper period.

Because the 7-year rule is applied after death, the burden of proving what was given, when, and to whom falls on your executors. Make their job possible:

• Keep a gift register — date, recipient, amount, and which exemption (if any) you intend it to use. A simple spreadsheet or notebook kept with your will is enough.
• Document "normal expenditure out of income" claims contemporaneously — HMRC's IHT403 form asks for a year-by-year breakdown of income and expenditure, which is very hard to reconstruct after death.
• Date large gifts deliberately. The clock runs from the date the gift is completed (money transferred, property conveyed), not when it was promised.
• Check the interaction with your will. Large lifetime gifts change how much nil-rate band your estate has left, which can distort a will drafted years earlier around different assumptions.

Use the 7-year gift taper calculator to see the position for a specific gift, and the inheritance tax calculator for the estate as a whole. For estates near or above the threshold, professional advice usually pays for itself many times over.