How the seven-year clock works
A gift to another individual is a potentially exempt transfer (PET). Nothing is due when you make it, and if you survive seven years it drops out of your estate entirely; the value counted is the value at the date of the gift. If you die within seven years, HMRC sets your non-exempt gifts from that period, oldest first, against the £325,000 nil-rate band. Gifts inside the band carry no tax of their own but use the band up, pushing more of the rest of your estate into the 40% charge. Tax on a failed gift is primarily the recipient's liability, so recipients of your most recent gifts are often the ones exposed.
The taper relief trap
Taper relief is widely misread as a discount for any gift more than three years old. In fact it reduces the tax on a gift, not its value, so it only bites once your cumulative gifts in the final seven years exceed £325,000. Above the band, the rate falls from 40% to 32% (3 to 4 years before death), 24% (4 to 5), 16% (5 to 6) and 8% (6 to 7). Gifts within the band are taxed at 0%, and tapering 0% still leaves 0%, so on most ordinary gifting programmes it never applies at all.
What to do
Use the exemptions that never enter the clock: £3,000 a year (plus one year's carry-forward), £250 small gifts to any number of people, wedding gifts of up to £5,000 for a child, and unlimited regular gifts out of surplus income. Keep dated records of every gift so your executors can prove the position. Do not give away an asset you intend to keep using, and note that gifts into most trusts follow different rules, with a possible immediate 20% charge above the band. Full details, including trusts and gifts with reservation, are in our guide to gifts and the 7-year rule.