Gifts and the 7-year inheritance tax rule
You can give money away during your lifetime to reduce inheritance tax, but if you die within seven years the gift can still be taxed. The good news is 'taper relief' reduces the tax the longer you survive. Here's how the rules work.
Potentially exempt transfers (PETs)
Most gifts to individuals are potentially exempt transfers. If you survive seven years from the date of the gift, it falls completely outside your estate and pays no IHT. Die within seven years and the gift is added back when working out the tax on your estate.
The sliding scale of tax
Taper relief reduces the tax on a gift (not the gift's value) based on how long you survived:
- 0–3 years: no relief — full 40%.
- 3–4 years: 20% relief — effective 32%.
- 4–5 years: 40% relief — effective 24%.
- 5–6 years: 60% relief — effective 16%.
- 6–7 years: 80% relief — effective 8%.
- 7+ years: fully exempt.
Taper only helps above the nil-rate band
Gifts you can make tax-free
Several gifts are exempt regardless of the seven-year rule:
- Annual exemption — £3,000 a year, and you can carry forward one unused year.
- Small gifts — £250 per person per year.
- Wedding gifts — up to £5,000 to a child, £2,500 to a grandchild, £1,000 to others.
- Gifts from surplus income — regular gifts out of income that don't affect your standard of living.
- Gifts to spouses, civil partners and UK charities are always exempt.
A £200,000 gift, death after 4 years
You gift £200,000 and use this year's £3,000 exemption, leaving a £197,000 PET. You made no earlier gifts, so your full £325,000 nil-rate band is available — the gift is entirely within it. Result: no tax on the gift, even though you died within seven years. However, that £197,000 reduces the nil-rate band available to the rest of your estate to £128,000, so the tax simply lands elsewhere.
If instead you had already gifted £200,000 before this one, only £125,000 of nil-rate band remains, leaving £72,000 of this gift taxable. At year four, 40% relief applies, giving tax of £72,000 × 24% = £17,280.
Common gifting mistakes
- Assuming taper relief always applies. It only reduces tax on the slice of gifts above the nil-rate band.
- Gifts with reservation of benefit. Giving away your home but continuing to live in it rent-free means it still counts as yours for IHT.
- Not recording gifts. Executors need dates and amounts; keep a clear record so the seven-year clock can be proven.
- Forgetting earlier gifts use the band first. Gifts are set against the nil-rate band in date order, which affects how much of a later gift is taxable.