Glossary · UK
What is Seven-Year Rule (Inheritance Tax)?
The popular name for the rule that lifetime gifts fall entirely outside your estate for Inheritance Tax purposes once you survive 7 years after making them.
Full Definition
The 'seven-year rule' is the everyday name for how potentially exempt transfers (PETs) are treated for Inheritance Tax. Most lifetime gifts to individuals are PETs: if the giver survives 7 years from the date of the gift, it becomes fully exempt from IHT and drops out of the estate calculation entirely. If the giver dies within those 7 years, the gift is added back into the estate for IHT purposes (using the nil-rate band available at the date of death first), though taper relief can reduce the rate of tax charged -- but only on gifts made more than 3 years before death, and only once the nil-rate band has been used up by earlier gifts. A common misconception is that taper relief reduces the value of the gift itself; it actually only reduces the rate of tax on the amount of the gift that exceeds the available nil-rate band.