Potentially Exempt Transfers: The 7-Year Rule Explained 2026/27
How potentially exempt transfers and the 7-year Inheritance Tax rule work in 2026/27 — taper relief, worked examples, and why gifts made shortly before death can still create a tax bill.
What makes a gift a "potentially exempt transfer"
Most straightforward lifetime gifts between individuals — cash, property, shares — that do not fall into an immediately exempt category (such as the annual exemption, small gifts, gifts to a spouse, or gifts to charity) are classed as potentially exempt transfers, or PETs. The name reflects the conditional nature of the exemption: the gift is potentially exempt from Inheritance Tax, but only becomes actually exempt once the donor survives seven full years from the date the gift was made.
If the donor dies within those seven years, HMRC treats the gift as if it were still, in a sense, part of the estate for Inheritance Tax calculation purposes — it is added back in, using up nil rate band in date order (earliest gifts first) before the rest of the estate is taxed.
Worked example: a gift that becomes chargeable
Example: In June 2022, Margaret gives her son £400,000 in cash — well above the £325,000 nil rate band alone. Margaret dies in March 2026, three years and nine months after the gift, having survived just short of four years.
Because Margaret died within seven years, the gift is not automatically exempt. It is added back into her estate's Inheritance Tax calculation, using up her available nil rate band (£325,000) first, leaving £75,000 of the gift potentially taxable. Because she died between 3 and 4 years after the gift, taper relief applies at 20%, reducing the tax rate that would otherwise apply (40%) to an effective 32% on the £75,000 excess — a tax bill of £24,000, primarily payable by her son as the recipient of the gift.
How taper relief actually works — a common misunderstanding
Taper relief is widely misunderstood as reducing the value of a gift for Inheritance Tax purposes. It does not. Taper relief only reduces the rate of tax charged, and only applies to the portion of a gift that exceeds the available nil rate band at the time of death. If a gift is fully covered by the nil rate band, taper relief is irrelevant because there is no tax to taper in the first place.
The taper relief scale is:
| Years between gift and death | Reduction in tax rate |
|---|---|
| 0-3 years | 0% (full 40% rate applies) |
| 3-4 years | 20% reduction |
| 4-5 years | 40% reduction |
| 5-6 years | 60% reduction |
| 6-7 years | 80% reduction |
| 7+ years | 100% (fully exempt) |
Gifts that are not PETs at all
Some lifetime gifts are exempt from Inheritance Tax immediately, regardless of how long the donor survives afterwards, and never enter the 7-year PET regime:
- The annual exemption of £3,000 per tax year (which can be carried forward one year if unused).
- Small gifts of £250 or less per recipient, per tax year, to any number of different people.
- Normal gifts out of surplus income, provided they are regular, come from income (not capital), and do not reduce the donor's standard of living.
- Gifts to a spouse or civil partner (UK-domiciled), which are unlimited and immediately exempt.
- Gifts to a registered charity, which are also unlimited and immediately exempt, and can additionally reduce the Inheritance Tax rate on the rest of the estate to 36% if enough of the estate is left to charity.
Practical planning points
- Keep clear written records of the date and value of any significant lifetime gift — the seven-year clock and any taper relief calculation depend entirely on establishing these facts accurately.
- Consider decreasing term life insurance written in trust to cover the potential Inheritance Tax liability on a large gift during the seven-year exposure window, so the recipient is not left with an unexpected tax bill.
- Remember that gifts with reservation of benefit — for example, gifting a house but continuing to live in it rent-free — are treated differently and generally do not succeed as PETs at all, regardless of survival.
- Plan gifts as early as realistically possible, since the whole benefit of the PET regime depends on time elapsed, and taper relief only softens the blow rather than eliminating it before the full seven years have passed.
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Open Inheritance Tax calculatorFrequently asked questions
What is a potentially exempt transfer?
A potentially exempt transfer, or PET, is a lifetime gift from one individual to another (or to certain types of trust) that becomes completely free of Inheritance Tax if the person making the gift survives for seven years afterwards. If they die within seven years, the gift may become chargeable after all.
What is the 7-year rule for Inheritance Tax gifts?
The 7-year rule means a potentially exempt transfer only becomes fully exempt from Inheritance Tax once the donor has survived seven full years from the date of the gift. If death occurs within seven years, the gift is added back into the estate calculation, potentially using up nil rate band and creating a tax charge.
How does taper relief work on gifts within seven years?
Taper relief reduces the rate of Inheritance Tax charged on a gift, not the value of the gift itself, and only applies once the gift exceeds the available nil rate band. It reduces the tax due on a sliding scale: 0% reduction within 3 years, 20% reduction in years 3-4, 40% in years 4-5, 60% in years 5-6, and 80% in years 6-7 of the tax that would otherwise be due.
Do all lifetime gifts count as potentially exempt transfers?
No. Gifts within your annual exemption (£3,000 per year), small gifts of £250 or less per person, normal gifts out of surplus income, and gifts to a spouse, civil partner or registered charity are usually immediately exempt regardless of survival. PETs specifically refer to larger outright gifts to individuals or certain trusts that are not otherwise exempt.
Who pays the Inheritance Tax if a PET becomes chargeable?
Primary liability for the tax on a failed PET usually falls on the recipient of the gift, though if they cannot or do not pay, HMRC can pursue the deceased's estate for the shortfall. This is one reason larger gifts are sometimes protected by decreasing term life insurance in trust.
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