Answers · UK 2025/26
How does the seven-year rule for gifts apply to inheritance tax?
Gifts made more than 7 years before death are generally exempt from inheritance tax. Gifts made within 7 years are potentially exempt transfers (PETs) and may be included in the estate. If the donor dies within 3 years, full 40% IHT may apply; taper relief reduces the rate for gifts made 3--7 years before death.
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The seven-year rule is one of the most important planning tools in UK inheritance tax. It allows individuals to make gifts free of IHT provided they survive for 7 years after making the gift. Gifts that fall within the 7-year window are called Potentially Exempt Transfers (PETs). **How PETs work** When you make a gift (other than to a trust), it is a PET. At the time, no IHT is immediately charged. If you survive 7 years after the gift, it falls permanently outside your estate. If you die within 7 years, the gift is brought back into your estate (in order of oldest first against the Nil Rate Band of £325,000). **Taper Relief -- Reducing the IHT Charge** If you die between 3 and 7 years after making a gift, taper relief reduces the IHT payable on that gift: | Years Between Gift and Death | IHT Rate on Gift | |---|---| | 0--3 years | 40% | | 3--4 years | 32% (20% taper relief) | | 4--5 years | 24% (40% taper relief) | | 5--6 years | 16% (60% taper relief) | | 6--7 years | 8% (80% taper relief) | | 7+ years | 0% (fully exempt) | **Important: taper relief applies only to the tax, not the gift value** Taper relief does not reduce the value of the gift counted in the estate -- it only reduces the IHT rate applied to any excess above the Nil Rate Band. **Worked Example** - Nil Rate Band: £325,000 - Gift made 5 years before death: £400,000 - Gift exceeds NRB by: £75,000 - Standard rate would be: £75,000 x 40% = £30,000 - With 60% taper relief: £30,000 x 40% = **£12,000 IHT payable** **Annual exemptions and small gifts** Not all gifts are PETs. The following are immediately exempt: - Annual gifting exemption: £3,000 per year (can carry forward one year) - Small gifts: up to £250 per person per year (unlimited recipients) - Wedding gifts: £5,000 (parent), £2,500 (grandparent), £1,000 (others) - Gifts out of normal income (regularly given from surplus income) **Gifts with reservation of benefit** If you give away an asset but continue to benefit from it (e.g., give your house to children but keep living in it rent-free), HMRC treats it as still in your estate -- the seven-year clock does not run.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.