IHT 7-Year Rule: Gifts, Taper Relief and PETs Explained UK 2026

Inheritance Tax (IHT) is charged at 40% on the value of an estate above the available nil-rate band. In 2026/27, the Nil Rate Band (NRB) is GBP 325,000 and the Residence Nil Rate Band (RNRB) is GBP 175,000, giving a potential combined threshold of GBP 500,000 for those leaving a qualifying residence to direct descendants. For many families, reducing the taxable estate through lifetime gifts is one of the most effective planning tools available -- and the seven-year rule is central to how that works.

What Is a Potentially Exempt Transfer (PET)?

A Potentially Exempt Transfer is a gift made by an individual during their lifetime to another individual (not to a trust, company, or other entity). The word "potentially" is key: the gift is not immediately exempt from IHT. Instead, it becomes fully exempt only if the donor survives for seven years after making the gift.

If the donor dies within seven years, the gift is brought back into the estate for IHT purposes and counts against the NRB. Once the NRB is exhausted, IHT is charged -- but taper relief may reduce the amount payable depending on how many years elapsed between the gift and the date of death.

There is no upper limit on the value of a PET. You can give away GBP 1 million as a PET and, if you survive seven years, the entire amount falls outside your estate. This makes PETs potentially very powerful for estate planning -- but the requirement to survive seven years means they suit those in reasonable health.

The Taper Relief Table

Taper relief reduces the IHT payable on a PET when the donor survives between three and seven years. It does not reduce the value of the gift -- it reduces the IHT charge on that gift.

The taper relief percentages (applied to the IHT that would otherwise be due) are:

• 0-3 years before death: no relief (full 40% IHT rate applies)
• 3-4 years before death: 20% reduction (effective IHT rate 32%)
• 4-5 years before death: 40% reduction (effective IHT rate 24%)
• 5-6 years before death: 60% reduction (effective IHT rate 16%)
• 6-7 years before death: 80% reduction (effective IHT rate 8%)
• Over 7 years: fully exempt, no IHT

A common misconception is that taper relief applies to the gift itself. It does not. If you gave GBP 200,000 and died four years later, the taper does not reduce the chargeable amount to 60% of GBP 200,000. Instead, it reduces the IHT rate from 40% to 24% (a 40% reduction in the tax), so the IHT payable is GBP 48,000 rather than GBP 80,000 -- but only once the NRB has been used up.

The NRB Must Be Exhausted First

Taper relief only applies to IHT actually due on the gift. If the PET falls within the NRB, no IHT is due and taper relief is irrelevant. This matters because PETs are applied chronologically against the NRB. Earlier gifts use up the NRB first.

Example: Robert has no prior gifts and makes a GBP 400,000 PET in 2022. He dies in 2026 -- four years later. The NRB of GBP 325,000 shelters the first GBP 325,000. The remaining GBP 75,000 is chargeable. Taper relief (40% reduction for a 4-5 year gap) reduces the IHT on GBP 75,000 from GBP 30,000 to GBP 18,000.

If the gift had been GBP 300,000, it falls entirely within the NRB. Taper is irrelevant because no IHT arises on the gift at all.

Annual Exemptions and Other Reliefs

Several annual reliefs reduce the value of gifts before the PET rules apply:

• Annual exemption: GBP 3,000 per donor per tax year (plus carry-forward of one unused prior year = up to GBP 6,000 in the first year of giving)
• Small gifts exemption: Up to GBP 250 to any number of recipients (cannot be combined with the annual exemption for the same recipient)
• Wedding/civil partnership gifts: GBP 5,000 to a child, GBP 2,500 to a grandchild or great-grandchild, GBP 1,000 to anyone else
• Regular gifts from income: Unlimited, if genuinely surplus to your normal living standard (must be habitual, from income not capital, and leave you with sufficient income for your own needs)
• Gifts to charities: Fully exempt, unlimited
• Gifts to spouses and civil partners: Fully exempt for UK-domiciled recipients

The annual exemption and small gifts exemption apply before the PET rules, reducing the chargeable amount of the transfer.

Gifts With a Reservation

A gift is only effective for IHT purposes if the donor gives away all benefit. If you give your house to your children but continue to live in it rent-free, it is a "gift with reservation of benefit" and remains in your estate regardless of the seven years. Similarly, giving assets into a trust where you retain a benefit does not work as a straightforward PET.

Record Keeping

Your executors will need evidence of all PETs made in the seven years before death to complete the IHT400 return. Keep records of:

• Date and value of each gift
• Name of recipient
• Any exemptions claimed at the time

Without records, HMRC may challenge the estate's IHT return and impose higher charges.

April 2026 Changes: BPR and APR

From April 2026, Business Property Relief (BPR) and Agricultural Property Relief (APR) -- both of which can apply to gifts of qualifying business or agricultural assets -- are capped at GBP 1 million of combined relief per individual, with 50% relief only on qualifying assets above that threshold. Gifts of such assets above the GBP 1 million cap will now carry a residual IHT liability even if the seven-year period is survived.

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Use the CalcHub inheritance tax calculator to model your estate's IHT exposure and see how lifetime gifts could reduce the bill for your beneficiaries.