The 7-year rule on gifts and inheritance tax explained

The rule in one paragraph

Give money or assets to another person and survive 7 years, and the gift is completely free of inheritance tax. Die within 7 years and the gift is pulled back into the calculation: it uses up your £325,000 nil-rate band before the rest of your estate does, and any excess can be taxed at up to 40%, softened by taper relief on a sliding scale for gifts made 3 to 7 years before death, down to 8% in the final year of the countdown.

Notice what taper relief works on in that paragraph: the tax, not the value of the gift, and only where total gifts in the 7 years before death exceed the nil-rate band. A £200,000 gift made 6 years before death gets no taper relief at all, because it never generated a tax bill of its own. It simply eats £200,000 of the nil-rate band your estate was counting on. This guide walks through the mechanics with worked numbers, and covers the gift with reservation trap that can stop the 7-year clock from ever starting. Inheritance tax works the same way across the UK, though the estate administration points mentioned here reflect England and Wales; treat everything on this page as general information rather than legal or financial advice.

Two kinds of gift: immediately exempt, or potentially exempt

For inheritance tax purposes, lifetime gifts fall into two boxes, and keeping them separate makes everything that follows easier.

Box one: gifts that are exempt straight away. These never enter the 7-year calculation, whenever you die. Under GOV.UK's guidance on gifts they include:

• The annual exemption: £3,000 of gifts per tax year, with one year of unused allowance carried forward (so up to £6,000 in a year if you gave nothing the year before).
• Small gifts of up to £250 per person per tax year, to as many people as you like, provided you have not used another allowance on the same person.
• Wedding and civil partnership gifts: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
• Normal expenditure out of income: regular gifts made from surplus income (not capital) that leave you able to maintain your usual standard of living. There is no upper limit, which makes this one of the most powerful and least used exemptions, though the record-keeping burden falls on your executors.
• Gifts to a spouse or civil partner, or to registered charities, which are exempt without limit.

Box two: everything else, which becomes a potentially exempt transfer. A PET is HMRC's term (set out in the Inheritance Tax Manual at IHTM04057) for a lifetime gift from one individual to another that is not covered by an exemption. Nothing is payable when you make it and nothing needs reporting to HMRC at the time. Its fate is decided later: survive 7 years from the date of the gift and it drops out of your estate entirely; die within 7 years and it becomes a chargeable transfer, or as advisers put it, a failed PET. Gifts into most trusts are treated differently again, as chargeable lifetime transfers with their own immediate rules.

What actually happens when a PET fails

Three things happen, in a specific order, and the order is where the surprises live.

1. All gifts made in the 7 years before death are lined up chronologically, oldest first.
2. Each gift is set against the £325,000 nil-rate band in turn. Gifts within the band generate no tax of their own, but they consume the band. Only whatever band is left after the gifts passes to the estate. Our guide to the UK inheritance tax threshold covers the band itself, which is frozen at £325,000 until 5 April 2031.
3. Any gift value above the available band is taxed, normally with the recipient asked to pay, at 40% reduced by taper relief where the gift was made more than 3 years before death.

Step 2 is the one that matters for most families, because most individual gifts are smaller than £325,000. The gift itself escapes tax, and the giver's family assumes the 7-year rule has done its job. What has actually happened is that the estate's tax-free band has shrunk by the amount of the gift, and the extra tax lands on the estate at the full 40% rate, with no taper relief, because taper relief never applies to the estate's own tax. It only reduces tax charged on the gift itself.

The taper relief table, both ways of reading it

Sources present taper relief in two different-looking ways: some quote the percentage reduction applied to the tax, others quote the tax rate you end up paying. Both describe the same scale, so here it is with both columns side by side, per GOV.UK and HMRC's manual at IHTM14612:

Years between gift and death	Reduction in the tax	Effective rate paid
Under 3 years	None	40%
3 to 4 years	20%	32%
4 to 5 years	40%	24%
5 to 6 years	60%	16%
6 to 7 years	80%	8%
7 years or more	Fully exempt	0%

So if you read one site saying "40% relief at 4 to 5 years" and another saying "the rate falls to 24%", they agree: a 40% reduction off a 40% charge leaves 24%. And HMRC's manual is explicit about the mechanism: the relief is a reduction of "the charge to tax on the transfer". The value of the gift is never reduced, and the nil-rate band it consumes is never reduced either.

Worked example: when taper relief helps, and when it does nothing

Gift above the nil-rate band: taper relief bites

Margaret gives her daughter £425,000 in cash in June 2021 (we will ignore the annual exemptions to keep the numbers clean). She dies in January 2026, 4 years and 7 months later, having made no other gifts. Her gift is set against the £325,000 nil-rate band first:

• Taxable part of the gift: £425,000 minus £325,000 = £100,000
• Tax at the full rate: 40% of £100,000 = £40,000
• The gift was made 4 to 5 years before death, so taper relief cuts the tax by 40%: £40,000 minus £16,000 = £24,000, an effective 24% on the taxable slice

Her daughter, as recipient, is normally the one liable for that £24,000. Meanwhile Margaret's estate has no nil-rate band left at all (the gift used every pound of it), so the whole estate above any other exemptions is taxed at 40%. Had Margaret survived to June 2028, the full 7 years, the gift and the £24,000 would both have vanished, and her estate would have kept its entire £325,000 band.

Gift inside the nil-rate band: taper relief does nothing

Now suppose Margaret had instead given her daughter £200,000 and died 6 and a half years later. Six-to-seven-year gifts sit in the most generous taper band, so many families assume "80% relief" applies. It does not, because there is nothing to relieve. The £200,000 sits comfortably inside the £325,000 band, so the tax on the gift itself is nil, and 80% of nil is nil. What actually happens is that Margaret's estate is left with only £125,000 of nil-rate band. If her estate is worth £500,000, the extra tax caused by the gift is 40% of £200,000, which is £80,000 more than if she had survived the full 7 years, and taper relief removes none of it. If you take one thing from this page, take this: taper relief reduces tax on the gift, never tax on the estate, and gifts within the nil-rate band generate no gift tax to reduce.

Where gifts affect who ultimately bears the tax, executors need to get this right during the administration: gifts made in the 7 years before death must be traced and declared, which is one reason careful estate accounts matter.

The trap that stops the clock: gift with reservation of benefit

The 7-year clock only starts when you genuinely give something away. The classic failure is the family home: parents sign the house over to the children, stay living in it rent free, and believe the 7-year countdown is running. It is not. Under GOV.UK's rules on passing on a home, this is a gift with reservation of benefit: you have given the asset away on paper while continuing to enjoy it, so HMRC treats the property as still part of your estate whenever you die, even 20 years later. The 7-year rule simply does not apply.

There are three recognised ways to give a home away effectively while the rules stay onside:

• Move out and survive 7 years, the clean version of the rule.
• Stay, but pay full market rent to the new owners, at the going rate for similar local rental properties, and pay your share of the bills. The rent must be genuinely paid and reviewed, and the recipients will usually owe income tax on it.
• Give away a share and genuinely co-occupy with the new owners, where sharing arrangements meet the conditions.

Anything short of that leaves the property in your estate, and can create capital gains tax and means-tested support problems on top. Home gifts are exactly the point where proper advice repays its cost many times over, particularly in blended families, where who ends up owning the house matters as much as the tax.

Using the rule well: practical points

• Start early and layer the exemptions. The immediately exempt gifts in box one carry no inheritance tax whenever you die. A couple using two annual exemptions with a carry-forward year can move £12,000 at a stroke, and regular gifts from surplus income can move far more, provided the pattern and affordability are documented.
• Keep records as you go. Executors must report gifts made in the 7 years before death (and gifts with reservation going back further). A simple running log of date, recipient, amount and which exemption you claimed saves your family real money and months of reconstruction. For income gifts, keep evidence of income versus spending.
• Mind the order of gifts. Because gifts consume the nil-rate band oldest first, large early gifts shelter later ones less than people expect, and life insurance written in trust is often used to cover the tax risk on a large PET during the 7-year window. Arranging insurance is regulated financial advice, so an FCA-authorised adviser is the right person for that conversation.
• Remember what gifting does not fix. Other levers interact with the same thresholds, and pensions in particular are changing: from April 2027 most unused pension funds join the estate, which our guide to the 2027 pension inheritance tax changes explains.

Where you stand, and where to go next

The 7-year rule rewards people who plan ahead and punishes deathbed generosity, but its real complexity is not the countdown, it is how gifts interact with the £325,000 nil-rate band your estate is relying on. Start by working out that position: our IHT threshold calculator shows how close your estate sits to the thresholds, and our inheritance tax pillar guide covers the allowances, including the residence nil-rate band and the combined position for married couples, that gifting decisions should be built around.

One last thought, for whoever will eventually administer your estate. Executors must reconstruct every gift made in the 7 years before death: dates, amounts, recipients and the exemptions claimed, often from years-old bank statements. If you are weighing a substantial gift, especially one involving a home, a business interest or anything you would keep using, we can put you in touch with an estate planning specialist who will map your gifting timeline now, while the facts are easy to establish, and pressure-test the plan before you sign anything.