IHT Gifts and the 7-Year Rule UK 2026 — How to Give Money Away Tax-Free

Inheritance tax (IHT) is charged at 40% on the portion of an estate above the nil-rate band (£325,000, frozen until at least April 2030). But with careful planning — especially around the rules governing lifetime gifts — many families can significantly reduce the IHT exposure of an estate without complex structures or expensive legal work.

The most important concept to understand is the 7-year rule: gifts made to individuals more than seven years before death are completely outside the estate for IHT. Below that threshold, a sliding scale of relief and various annual exemptions can still reduce the charge.

Two Types of Lifetime Gift

Potentially Exempt Transfers (PETs)

A Potentially Exempt Transfer is a gift made directly to another individual (not a trust). PETs are:

• Potentially exempt because they become fully exempt if the donor survives for seven years
• Brought back into the estate (as a "failed PET") if the donor dies within seven years
• Not subject to any IHT at the time of gift — no immediate charge

The vast majority of gifts between family members are PETs: money, investments, property given outright, assets held jointly and then transferred.

Chargeable Lifetime Transfers (CLTs)

Chargeable Lifetime Transfers are gifts into most types of trust. Unlike PETs, CLTs:

• Are subject to an immediate lifetime IHT charge of 20% on the amount above the nil-rate band at the time of the gift
• Are subject to a further charge if the donor dies within seven years (the cumulative total is reassessed at death rates)
• Face periodic charges (every 10 years) and exit charges when trust property is distributed

For most families, CLTs arise when using discretionary trusts for estate planning. The immediate 20% charge and ongoing complexity mean trusts are often less attractive than simple PETs for straightforward gifting.

The 7-Year Rule in Detail

Survival Fully Clears the Gift

If a donor makes a PET and survives for exactly seven years or more, the gift is completely outside the taxable estate. It is as if the transfer never happened for IHT purposes.

What Happens If the Donor Dies Within Seven Years?

If the donor dies within seven years of the gift, the PET becomes a failed PET and is added back into the estate for IHT calculation. However, taper relief reduces the effective IHT rate on the failed PET:

Important: Taper relief reduces the tax on the gift — it does not reduce the value counted as part of the estate. It also only applies if the total of failed PETs and the remaining estate exceeds the nil-rate band.

How CLTs Affect the NRB Available to PETs

HMRC uses a specific order when applying the nil-rate band at death:

1. CLTs made in the seven years before death use the NRB first
2. Failed PETs then use whatever NRB remains
3. The remaining estate uses any residual NRB

This "queue" means that making large CLTs close to a PET can inadvertently erode the NRB available to the PET, increasing IHT on both.

Annual Exemptions and Small Gift Rules

Annual Gift Exemption: £3,000

Each individual can give away £3,000 per tax year completely free of IHT — this is the Annual Exemption. Key rules:

• If unused in the current year, it can be carried forward one year only
• The exemption applies per donor, so a couple can give £6,000/year combined
• Carrying forward: if you gave nothing last year, you can give £6,000 this year (£3,000 current + £3,000 carried forward)
• Gifts must come from capital (or income not sheltered by the normal expenditure exemption)

Small Gifts Exemption: £250 per Person

You can give any number of people up to £250 each per tax year, completely exempt from IHT. There is no limit on the number of recipients, but:

• The £250 cannot be combined with the £3,000 annual exemption for the same recipient
• If you give someone £251, the full amount falls outside the small gift exemption (though it may be covered by the annual exemption)

Wedding and Civil Partnership Gifts

Gifts made in consideration of a marriage or civil partnership enjoy specific exemptions:

The gift must be made before the ceremony (or conditionally upon it) to qualify. A cheque handed over the morning of the wedding qualifies; a gift given three months later does not.

Normal Expenditure from Income: The Most Powerful Exemption

The normal expenditure out of income exemption has no annual monetary cap — it is potentially the most valuable IHT-planning tool available to those with surplus income. Gifts qualify if all three conditions are met:

1. The gift is made from income (not capital)
2. The gifts are habitual — they form part of a regular pattern of giving
3. After making the gift, the donor is left with sufficient income to maintain their normal standard of living

Regular payments that might qualify include:

• Monthly payments into a grandchild's Junior ISA or pension
• Annual premiums on a life insurance policy written in trust
• Regular cash transfers to family members from pension drawdown income
• Paying a child's university fees or rent from income

The exemption is particularly powerful for retirees whose pension and investment income exceeds their expenditure. A retiree with £80,000/year income spending £50,000 on their own needs can potentially give away £30,000/year with no IHT implications — far beyond what the annual exemption alone allows.

Record-Keeping Requirement

HMRC requires executors to provide detailed evidence that gifts qualified under this exemption. This means the donor should keep records showing:

• Each gift made (date, amount, recipient)
• Total income for the year
• Total expenditure on their own lifestyle
• That the gift pattern was habitual (at least 2–3 years of consistent giving)

HMRC's form IHT403 asks executors to complete a schedule of regular gifts. Without records, executors may struggle to claim the exemption and the gifts could be treated as failed PETs.

Gifts on Death: Last-Minute Planning

One common misconception: the £3,000 annual exemption does not apply to gifts made in the year of death — it applies to gifts from the current and immediately preceding tax year. A gift made six months before death may still be within the seven-year period and therefore become a failed PET.

If the annual exemption was unused in 2024/25, it can be carried forward to 2025/26 and used in that year. If the donor dies in 2025/26 before using the 2025/26 exemption, the carry-forward from 2024/25 can be applied to gifts made in 2025/26, giving up to £6,000 exempt.

Gifting Property and Assets Other Than Cash

The 7-year rule applies to all types of lifetime gift, not just cash. However, additional rules can apply:

Gifts with Reservation of Benefit (GWROBs)

If you give away an asset but continue to benefit from it — for example, you gift your home to your child but continue living in it rent-free — the gift is a Gift With Reservation of Benefit and it remains in your taxable estate regardless of how long ago you made it. The 7-year clock does not start.

To avoid GROB status on a gifted property, you must either vacate the property or pay a full market rent to the new owner (which itself creates rental income for them).

Capital Gains Tax on Non-Cash Gifts

Giving away an asset that has increased in value (shares, a second property, etc.) triggers a Capital Gains Tax disposal even though no cash changes hands. The gift is treated as a disposal at market value. Plan the CGT consequence before making large non-cash gifts.

The April 2027 Pension Change

From April 2027, unused pension funds will be brought within the IHT estate. Currently, uncrystallised pension pots pass outside the estate entirely (a major reason wealthy individuals hold large pension funds). After 2027, designated pension beneficiaries will still receive the funds, but the value will count towards IHT.

This change makes the normal expenditure from income exemption more important: drawing down pension income and gifting it (where it exceeds living costs) removes it from both the pension fund and the estate. Plan for this change before April 2027.

Seven Practical Steps for Gift Planning

1. Use the £3,000 annual exemption every year — and the carry-forward if unused. Do not let it lapse.
2. Document normal expenditure from income gifts from the first payment, even if modest amounts.
3. Coordinate with your spouse — two individuals means two sets of exemptions and two 7-year clocks.
4. Keep a gift register — date, amount, recipient, how funded (income or capital), and which exemption used.
5. Consider life insurance in trust to cover expected IHT on failed PETs — premiums may themselves qualify under normal expenditure from income.
6. Review before April 2027 — with pension changes incoming, those holding large pension funds should model the new IHT position.
7. Avoid GWROBs — particularly with property gifts to children while remaining in occupation.

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Use our Inheritance Tax Calculator to estimate your current estate's IHT exposure and see how lifetime gifts and exemptions reduce the projected charge, and our Income Tax Calculator to understand how pension drawdown income affects the normal expenditure from income exemption calculation.