Inheritance Tax Gifting Rules 2026/27: The Seven-Year Rule and Annual Exemptions
Gifts can reduce your eventual Inheritance Tax bill, but only if you survive seven years, and the rules on annual exemptions and taper relief are widely misunderstood. Here's exactly how gifting works for 2026/27.
The Annual Exemptions: Gifts With No Seven-Year Wait
Several categories of gift are exempt from Inheritance Tax immediately, with no need to survive any period afterward:
| Exemption | Amount | Notes |
|---|---|---|
| Annual exemption | £3,000 total per tax year | Can be given to one person or split across several; unused amount carries forward one tax year only |
| Small gifts exemption | £250 per person, per tax year | Any number of different recipients, but can't combine with the £3,000 exemption for the same person |
| Wedding/civil partnership gifts | £5,000 (parent), £2,500 (grandparent/great-grandparent), £1,000 (anyone else) | Must be made in consideration of the marriage/civil partnership |
| Gifts out of normal expenditure from income | Unlimited, if genuinely regular and from surplus income (not capital) | Must not reduce the giver's standard of living; requires clear record-keeping |
| Gifts to spouse/civil partner (UK-domiciled) | Unlimited | No seven-year rule applies at all |
| Gifts to registered charities | Unlimited | Also can reduce the overall IHT rate on the rest of the estate if enough is left to charity |
Using the £3,000 annual exemption every year, consistently, is one of the simplest and most reliable ways to pass on wealth gradually without any seven-year survival risk attached.
Potentially Exempt Transfers: The Seven-Year Rule
Gifts above the exemptions above are classed as Potentially Exempt Transfers (PETs). The name reflects their conditional status:
| Time between gift and death | IHT treatment |
|---|---|
| Donor survives 7+ years | Gift falls entirely outside the estate — no IHT due on it |
| Donor dies within 7 years | Gift is brought back into the estate calculation for IHT purposes |
If the donor dies within 7 years, the gift's value is added back into the estate when calculating Inheritance Tax — using up the nil-rate band (£325,000 for 2026/27) in date order (earliest gifts first), potentially leaving less nil-rate band available for the rest of the estate, and potentially triggering tax on the gift itself if the cumulative total of gifts and estate exceeds the available nil-rate band.
Taper Relief: What It Actually Reduces
Taper relief is widely misunderstood — it does not reduce the value of the gift counted towards the estate. It only reduces the tax rate applied to the portion of a gift that exceeds the available nil-rate band, and only if death occurs between 3 and 7 years after the gift.
| Years between gift and death | Taper relief reduction | Effective IHT rate on the excess |
|---|---|---|
| 0 – 3 years | 0% reduction | 40% (full rate) |
| 3 – 4 years | 20% reduction | 32% |
| 4 – 5 years | 40% reduction | 24% |
| 5 – 6 years | 60% reduction | 16% |
| 6 – 7 years | 80% reduction | 8% |
| 7+ years | Fully exempt | 0% |
Important: if the gift itself is fully covered by the available nil-rate band (i.e., no tax would be due on it regardless of the timing), taper relief provides no benefit at all — it only matters where the gift, combined with the rest of the estate, exceeds the nil-rate band and IHT is genuinely due on that specific gift.
Worked Example
Someone gives away £400,000 (above all annual exemptions) and dies 4.5 years later, with no other gifts made and an available nil-rate band of £325,000 (assuming none used elsewhere).
| Step | Amount |
|---|---|
| Gift value | £400,000 |
| Nil-rate band available | £325,000 |
| Amount of gift exceeding nil-rate band | £75,000 |
| Years survived | 4.5 (falls in the 4-5 year band) |
| Taper relief reduction | 40% |
| Effective rate on the excess | 24% |
| IHT due on the gift | £75,000 × 24% = £18,000 |
The first £325,000 of the gift is covered by the nil-rate band and attracts no tax at all — only the £75,000 excess is taxed, and taper relief reduces the rate on that excess from 40% to 24% because of the 4.5-year survival period.
Gift With Reservation of Benefit: The Home-Gifting Trap
A common (and generally ineffective) IHT planning idea is giving away a home to children while continuing to live in it. This is specifically caught by the gift with reservation of benefit rule: if you continue to benefit from a gifted asset — such as living in a gifted home without paying a full market rent — HMRC treats the asset as still forming part of your estate for IHT purposes when you die, regardless of the seven-year rule.
To genuinely remove a home from the estate while still living in it would typically require paying full market rent to the new owner(s), on an ongoing, genuine commercial basis — a step with its own financial and tax implications (the rent received would be taxable income for the new owners, for instance) that many people find impractical or unappealing. Anyone considering this kind of arrangement should get professional advice, as the rules are strict and the potential downside of getting it wrong (the value still being taxed, having already lost legal ownership) can be significant.
Practical Gifting Strategy
- Use the £3,000 annual exemption every year, consistently — this removes value from the estate immediately with no survival risk.
- Consider gifts out of surplus income for larger, regular gifting, provided genuine records are kept showing the gifts don't reduce your standard of living.
- For larger one-off gifts, understand the seven-year exposure and consider term life insurance (a "gift inter vivos" policy) specifically designed to cover the potential IHT liability if the donor dies within the seven-year window.
- Don't attempt to keep using a gifted asset (like a home) without paying full market rent — this typically fails to achieve the intended IHT saving.
- Keep clear records of all gifts made, including dates and values — executors need this information to correctly calculate any IHT due on the estate.
Frequently asked questions
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