Gifts and the 7-Year Rule: How Lifetime Giving Cuts Inheritance Tax

For most lifetime gifts, the answer is simple: nothing is due at the time you make them, and nothing is ever due if you live for seven years afterwards. Inheritance tax on gifts is a death-time calculation. HMRC only looks back over the seven years before you die to see which gifts still count against your estate.

When you die, HMRC lists the gifts you made in those seven years that are not covered by an exemption, oldest first, and sets them against your nil-rate band. For 2026/27 the nil-rate band is £325,000, frozen at this level until April 2030 (the end of the 2029/30 tax year). Gifts that fall within the available nil-rate band are effectively taxed at 0%. Only the value of gifts above the band can be taxed, at the standard inheritance tax rate of 40%.

This matters because it changes who bears the cost and when. Tax on a failed gift is primarily the recipient's liability, calculated separately from the tax on the rest of your estate, which is charged after the nil-rate band has already been used by the earlier gifts. In practice, the people who received your most recent gifts, made closest to death, are often the ones exposed to tax, because the earlier gifts absorb the band first.

Not every gift enters this calculation. Gifts covered by an annual or lifetime exemption drop out immediately and are never counted, no matter when you die. Transfers between spouses or civil partners who are both UK long-term residents are entirely exempt, with no seven-year clock and no limit. Everything that follows concerns the gifts that are not already exempt.

A gift to another individual that is not covered by an exemption is a potentially exempt transfer, or PET. It is potentially exempt because it becomes fully exempt if you survive seven years from the date of the gift. Survive the seven years and the gift is ignored for inheritance tax completely. Die within them and the gift becomes chargeable and is brought back into the seven-year calculation.

There is no upper limit on the size of a PET. You can give away £10,000 or £10,000,000; both become exempt on the seventh anniversary. The value counted is normally the value at the date of the gift, not at the date of death, which can be an advantage for assets you expect to grow, such as shares or property.

When a PET fails because you die within seven years, it is set against your nil-rate band in date order. If your cumulative gifts in the seven years before death stay within £325,000, there is no tax on the gifts themselves, though they reduce the nil-rate band available to the rest of your estate. Only where cumulative gifts exceed the nil-rate band does tax actually fall due on a gift.

• Gift made and you survive 7 years: fully exempt, ignored for inheritance tax.
• Gift made and you die within 7 years: brought back in, set against the nil-rate band oldest first.
• Cumulative gifts within £325,000: no tax on the gifts, but they use up the band.
• Cumulative gifts above £325,000: the excess is taxable at up to 40%, subject to taper relief.

One subtlety worth flagging: if you made a chargeable lifetime transfer, typically a gift into a trust, in the seven years before a PET, that earlier transfer can reduce the nil-rate band available to the PET and increase the tax on it. This is the interaction sometimes called the 14-year rule, and it is a point to confirm with an adviser where trusts are in the picture.

Taper relief reduces the tax due on a gift, not the value of the gift, on a sliding scale where death falls between three and seven years after the gift. It never applies to gifts made less than three years before death, which remain taxable at the full 40%. Here is the scale HMRC applies to the tax:

• 3 to 4 years before death: tax charged at 32% (a 20% reduction).
• 4 to 5 years before death: tax charged at 24% (a 40% reduction).
• 5 to 6 years before death: tax charged at 16% (a 60% reduction).
• 6 to 7 years before death: tax charged at 8% (an 80% reduction).

Now the myth. Many people believe that any gift made three or more years before death gets a discount. It does not. Taper relief only bites once your total gifts in the seven years before death exceed the £325,000 nil-rate band, because taper reduces tax, and there is no tax to reduce on gifts that sit within the band. Gifts within the nil-rate band are already taxed at 0%; tapering 0% still leaves 0%.

So taper relief is genuinely useful only for large givers whose cumulative seven-year gifts run well past £325,000. For a client who gave a single £400,000 gift five years before death, taper would reduce the tax on the £75,000 slice above the band. For someone whose lifetime gifts total £200,000, taper is irrelevant, though the seven-year rule still matters because surviving the full period removes the gift from the estate altogether.

The practical takeaway: do not rely on taper as your main planning tool. The prize is surviving seven years so the gift is exempt in full. Taper is a partial consolation where large gifts fail, not a discount that rewards mere longevity on ordinary gifts.

Some gifts are exempt from the moment you make them and never enter the seven-year clock. Used consistently, these exemptions move meaningful value out of an estate with no survivorship risk at all. They are among the most reliable and under-used tools in estate planning.

• Annual exemption: £3,000 of gifts each tax year, to one person or split between several. If you did not use last year's exemption, you can carry it forward for one year only, giving a potential £6,000 in a single year.
• Small gifts exemption: up to £250 per person, to as many different people as you like each tax year. You cannot combine it with the annual exemption for the same person, and if a gift to one person exceeds £250 the exemption is lost for that person entirely.
• Wedding or civil partnership gifts: £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else. The gift must be made on or shortly before the wedding.
• Normal expenditure out of income: regular gifts from surplus income are exempt with no cash limit, provided they form a settled pattern, come from income rather than capital, and leave you able to maintain your usual standard of living.

The normal expenditure out of income exemption deserves special attention because it is both powerful and frequently overlooked. There is no cap on the amount. A client with genuinely surplus income, for example a large pension or dividend stream they do not need to live on, can gift substantial sums each year, entirely outside the seven-year rule, provided the gifts are habitual and paid from income. Keeping clear records of income, outgoings and the pattern of giving is essential, because the personal representatives will need to demonstrate the exemption to HMRC after death.

You can also stack exemptions. On a child's wedding you could give the £5,000 wedding gift and £3,000 annual exemption in the same year, and continue regular gifts out of income alongside. None of these engage the seven-year clock, so they are effective even if you do not survive long after making them.

A gift only works for inheritance tax if you genuinely give the asset away and stop benefiting from it. If you give something away but keep the use or enjoyment of it, HMRC treats it as a gift with reservation of benefit, and the asset stays in your estate for inheritance tax despite the legal transfer. The seven-year clock does not save it.

The classic example is giving your home to your children while continuing to live in it rent-free. Legally the house is theirs; for inheritance tax it is still yours, because you have reserved a benefit. To escape the rule you would generally need to move out, or pay a full market rent for as long as you remain, which brings its own income tax and practical consequences.

Reservation can be subtle. Giving away a holiday home but continuing to use it for free, or gifting an investment while still taking the income, can all trip the rule. Where a reservation exists at death, the asset is taxed in your estate at its value then, not at the value when you made the gift, which removes the growth advantage a clean PET would have offered. This is one of the most common and expensive mistakes in do-it-yourself estate planning, and it is worth taking advice before gifting any asset you want to keep using.

Gifts into most trusts are treated very differently from gifts to individuals. Rather than being potentially exempt, a gift into a discretionary or relevant property trust is a chargeable lifetime transfer, assessed for inheritance tax at the moment you make it. To the extent the transfer exceeds your available nil-rate band, it attracts an immediate lifetime charge of 20%. If the trustees pay the tax the rate is 20%; if you pay it, the effective rate is higher because the tax itself is also a transfer of value.

The seven-year rule still applies on top. If you die within seven years of a chargeable lifetime transfer, the transfer is reassessed at the death rate of up to 40%, with credit for the 20% already paid and taper relief available on the same three-to-seven-year scale. Survive seven years and no further inheritance tax arises on the original transfer, though the assets remain inside the trust's own regime.

Once inside a relevant property trust, assets fall under a separate charging system. Broadly, trusts face a principal charge of up to 6% on each ten-year anniversary and proportionate exit charges when capital leaves, with each trust having its own nil-rate band. Trusts can be an effective way to control assets and manage exposure, but the mechanics are technical and the excluded property rules for non-UK assets are now based on residence from 6 April 2025. For the full picture, see our related guide on trusts and inheritance tax.

Two further reforms change the wider gifting landscape for larger estates. From 6 April 2026, 100% business relief and agricultural relief is capped at a combined £2.5 million per person, with relief above that falling to 50% (an effective 20% charge on the excess), and business relief on AIM and most other unlisted shares reduces to 50%. The £2.5 million allowance is transferable to a surviving spouse or civil partner, so a couple can potentially shelter up to £5 million of qualifying property. From 6 April 2027, unused pension funds and death benefits are brought within the estate for inheritance tax. Both make lifetime gifting more relevant for affected families, and both should be factored into any gifting strategy.

Common questions on how the 7-year rule and lifetime gifts work in practice.