The 7-year rule for inheritance tax gifts: how it works - My Local Will Writer
If you give money or assets to someone during your lifetime, those gifts may still be included in your estate for inheritance tax purposes if you die within seven years. This is the basis of what is commonly called the seven-year rule.
The rule exists to prevent people avoiding inheritance tax simply by giving everything away shortly before death. But it also creates a genuine planning opportunity. Gifts made more than seven years before death fall outside your estate entirely.
What is a potentially exempt transfer?
A potentially exempt transfer (PET) is a gift made to another individual during your lifetime, rather than to a trust. It is “potentially” exempt because it only becomes fully exempt once you have survived for seven years after making it.
If you survive seven years from the date of the gift, it falls outside your estate for inheritance tax purposes. If you die within seven years, the gift may be brought back into your estate and inheritance tax may be due, depending on the size of the gift and your other assets.
PETs can be any amount, and there is no upper limit. You can give away savings, property, shares or other assets as a PET. For most people, PETs are most relevant when making larger gifts to children, grandchildren or other family members. Smaller amounts may already be covered by the annual exemption or other immediate exemptions.
The seven-year clock starts from the date the gift is actually made, not the end of the tax year. If you make multiple gifts, each one has its own clock. The oldest gifts are set against the nil-rate band first, which can affect how much inheritance tax is due on later gifts if you die within the seven-year window.
What is taper relief?
If you die within seven years of making a gift, taper relief may reduce the inheritance tax due on that gift. The relief depends on how many years passed between the date of the gift and the date of your death:
| Years between gift and death | IHT rate on the gift |
|---|---|
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| More than 7 years | 0% |
Many people assume taper relief reduces the value of the gift itself. It does not: it reduces the inheritance tax due on the gift, and only where the gift is large enough to create a charge in the first place.
Gifts are set against the nil-rate band first. The standard nil-rate band is £325,000. If the total of your lifetime gifts falls within that threshold, no inheritance tax will be due on them regardless, and taper relief does not come into play. In practice, taper relief matters most where lifetime gifts exceed the available nil-rate band, which affects far fewer estates than people tend to assume.
Which gifts are exempt immediately?
Not all gifts need to survive seven years to be free from inheritance tax. Several categories are exempt straight away, regardless of when you die.
The annual exemption allows you to give away up to £3,000 in each tax year. If you did not use the previous year’s allowance, you can carry it forward for one year, giving you up to £6,000 in total.
The small gift exemption covers individual gifts of up to £250 to any number of people. You cannot combine this with the annual exemption for the same person in the same year.
Wedding and civil partnership gifts are also exempt up to certain limits: £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else. The gift must be made before the wedding or civil partnership takes place.
Gifts made out of your normal income may also be exempt with no upper limit, provided they are regular, come from income rather than capital, and leave your standard of living unchanged. HMRC expects to see a clear pattern, such as regular monthly or annual payments of a consistent amount, so detailed record-keeping from the outset matters.
Gifts to qualifying charities and to a UK-domiciled spouse or civil partner are fully exempt.
Gifts into trusts
Gifts into discretionary trusts are treated differently from gifts made directly to an individual. They are classified as chargeable lifetime transfers rather than potentially exempt transfers, which means inheritance tax may be due at 20% when the gift is made if it exceeds the available nil-rate band.
Additional charges can apply every ten years while the trust continues, and when assets are distributed out of the trust.
Trusts can be a useful tool where ongoing control or long-term protection of assets is a priority, and they are worth considering in the right circumstances. But the tax treatment is more involved than a direct gift to an individual, and the two should not be treated as equivalent. If you are considering putting assets into a trust, professional advice before making the gift is worth seeking.
Record-keeping matters
Your executor is legally required to report gifts made in the seven years before your death to HMRC. Without records, they may need to contact banks, family members and others to piece the history together, which can add significant time to the estate administration process and create avoidable difficulty for your family.
One of the most common things people overlook when making their will is a record of the gifts they have already made. A simple gift log puts this in order while it is easy: note the date of the gift, the name of the recipient, the amount or asset given, the reason for the gift, and any exemption you believe applies. You do not need anything elaborate. A written note, a spreadsheet or a simple document will do, provided your executor can find it.
Keep it with your will or alongside your other estate planning documents.
Planning your gifts and planning your will go together. If you have made significant gifts, your will should reflect the current state of your estate. My Local Will Writer works by phone, and the process tends to be quicker than people expect. Get a quote here.
Seven-year rule inheritance tax FAQs
What is the seven-year rule for inheritance tax?
The seven-year rule means that gifts made during your lifetime are usually outside your estate for inheritance tax if you survive for seven years after making them. If you die within seven years, the gift may be included in the inheritance tax calculation.
What is a potentially exempt transfer?
A potentially exempt transfer is a gift made to another individual during your lifetime. It becomes fully exempt from inheritance tax if you survive for seven years after making the gift.
What is taper relief on gifts?
Taper relief can reduce the inheritance tax due on a gift if you die between three and seven years after making it. It reduces the tax on the gift, not the value of the gift itself.
Which gifts are exempt from inheritance tax immediately?
Several categories of gift are exempt straight away, including the annual exemption of up to £3,000 per year, small gifts of up to £250 per person, certain wedding or civil partnership gifts, gifts to qualifying charities and gifts to a spouse or civil partner.
Do gifts into trusts follow the seven-year rule?
Gifts into most discretionary trusts are treated as chargeable lifetime transfers rather than potentially exempt transfers. Tax may be due when the gift is made and at further points during the life of the trust.
How do I record gifts for inheritance tax purposes?
Keep a simple record noting the date of the gift, who received it, what was given, the reason and any exemption you believe applies. Store it with your will or estate planning documents so your executor can find it.