UK Inheritance Tax 7-Year Rule: How PETs Actually Work

Quick answer

In the UK, you can give away unlimited amounts during your lifetime. Most of those gifts are Potentially Exempt Transfers (PETs):

• Survive 7 years from the date of the gift → the gift falls entirely outside your estate.
• Die within 7 years → the gift is added back to your estate; tax may apply.

The widely repeated "taper relief" only reduces the tax on the gift between year 3 and year 7, and only if cumulative gifts in the seven years before death exceed £325,000. Below the nil-rate band, taper has no effect.

The four IHT bands you need to know in 2025/26

IHT applies at 40% on the estate above these allowances (36% if at least 10% of net estate goes to charity).

The RNRB tapers when the total estate exceeds £2 million — at the rate of £1 for every £2 over. Above £2.35m of estate value, RNRB is fully lost.

How a PET actually works on death

1. Take every gift made in the 7 years before death.
2. Apply them in date order, oldest first.
3. Each gift uses up nil-rate band before any IHT bites.
4. If cumulative gifts exceed £325,000, the excess is the part that may attract IHT.
5. Taper relief then reduces the IHT due (not the gift value) by:

The key trap: taper applies only when the gift sits above the nil-rate band. A gift that fits inside £325,000 uses up the NRB but doesn't itself attract tax that could be tapered.

Worked example — Margaret, £500,000 of gifts over 5 years

Margaret (widowed) gives:

• 2021: £150,000 to her son.
• 2023: £200,000 to her daughter.
• 2025: £150,000 to a grandchild.
• Total gifts in 5 years: £500,000.

She dies in 2026. Estate at death: £600,000 (after spending some of her remaining wealth).

Step 1 — apply gifts in order against the £325,000 NRB:

• 2021 gift (£150,000) → fully inside NRB. £175,000 NRB remaining.
• 2023 gift (£200,000) → uses last £175,000 of NRB. £25,000 above NRB.
• 2025 gift (£150,000) → fully above NRB.

Step 2 — IHT on the gifts above NRB:

• £25,000 (2023) at 40% = £10,000. Death is 3 years later → 20% taper → £8,000.
• £150,000 (2025) at 40% = £60,000. Death is 1 year later → no taper → £60,000.

Step 3 — IHT on the remaining estate:

• Estate £600,000 with no NRB remaining (consumed by gifts).
• RNRB £175,000 (assume home passed to children) → £600,000 − £175,000 = £425,000 taxable.
• Tax: £425,000 × 40% = £170,000.

Total IHT bill: £238,000 on £500,000 of gifts plus £600,000 estate = £1.1m of total wealth.

Had Margaret survived two more years, the 2021 gift would have dropped out of the 7-year tally — useful, but the 2025 gift would still have been freshly taxable.

Gifts that are immediately exempt — no 7-year clock

These do not start a PET clock at all:

• £3,000 per tax year — the annual exemption. Can carry forward one year if unused, so up to £6,000 in one go.
• £250 per recipient per year — for any number of recipients (not the same person who also gets the £3,000).
• Wedding gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else.
• Gifts to a UK spouse or civil partner — unlimited, no IHT.
• Gifts to UK charities or political parties — unlimited, no IHT.
• Regular gifts out of surplus income — unlimited, but you must show:
  • It came from income (not capital).
  • It was part of a regular pattern (e.g. monthly or annual).
  • It didn't reduce your standard of living.

The "out of surplus income" exemption is the most powerful — and the most under-used. A retired professional with £60,000 of pension income who spends £40,000 can gift £20,000/year, indefinitely, IHT-free, with no PET clock.

Worked example — David, regular gifts out of income

David, retired GP, has £80,000/year of pension income and spends £45,000. He documents:

• 5 years of bank statements showing £80k income, £45k spending.
• £35,000/year transferred to his daughter on the same date each January.
• A standing instruction set up at the start.

On death after 10 years, executor files IHT403 claiming "normal expenditure out of income" exemption. £350,000 of gifts falls entirely outside the estate — no IHT on any of it, no PET clock to manage.

Common mistakes

1. Assuming taper "reduces the gift". It reduces the tax, and only if you've blown through the nil-rate band.
2. Not documenting gifts. Executor has to find them. Write a simple ledger: date, recipient, amount.
3. Gifting the family home but continuing to live there. This is a gift with reservation of benefit — falls back into the estate regardless of the 7 years.
4. Mixing up PETs and CLTs. Gifts into a discretionary trust are CLTs with immediate 20% lifetime tax above NRB. Use bare trusts to keep PET treatment.
5. Ignoring the £2m RNRB taper. A £2.5m estate may have no RNRB at all — gift down to under £2m for the full £175,000.

How this interacts with the 2026 Budget

Spring 2026 left the £325,000 NRB and £175,000 RNRB unchanged and frozen through 2030 — the freeze is the policy. With inflation, more estates cross the thresholds each year. The 7-year rule and taper bands remain unchanged.

Try the calculator

Related reading:

• Inheritance Tax UK 2025/26
• Pension Carry Forward Allowance 2025/26
• Capital Gains Tax on Shares UK

Sources

• HMRC: How Inheritance Tax works: thresholds, rules and allowances
• HMRC: Tax on gifts before death
• HMRC: Form IHT403 — gifts and other transfers of value
• HMRC: Inheritance Tax manual — normal expenditure out of income