The UK IHT 7-Year Rule: Lifetime Gifts, PETs & Taper Relief

The Core Concept

Under UK IHT law, when you make a gift during your lifetime, that value leaves your estate immediately — but conditionally. If you live for seven years from the date of the gift, it is considered fully outside your estate and ignored when IHT is calculated at death. If you die within seven years, the gift is “clawed back” into the estate calculation and may be charged at up to 40%.

The seven-year clock is strict: it runs from the actual date the gift was made, not from the end of the tax year, not from when the recipient deposited the cheque. For significant gifts, document the date carefully — bank transfer dates, deeds of gift, or signed contracts all serve as evidence.

For gifts above the £325,000 nil-rate band (NRB) made between three and seven years before death, “taper relief” reduces the rate of IHT payable. Critically, taper relief reduces the tax, not the value of the gift — a distinction many taxpayers misunderstand.

Two Types of Lifetime Gift

UK IHT law splits lifetime transfers into two categories:

PETs — Potentially Exempt Transfers

A PET is an outright gift to another individual, or to a bare trust or trust for a disabled person. There is no immediate IHT and no reporting required during your lifetime. If you survive seven years, the gift is fully exempt and ignored entirely. If you die within seven years, it becomes a “failed PET” and is brought back into the estate computation.

CLTs — Chargeable Lifetime Transfers

A CLT is a gift into most types of trust — typically discretionary trusts or interest-in-possession trusts created after 2006. CLTs above the NRB attract an immediate 20% lifetime IHT charge when made. If the donor dies within seven years, the gift is reassessed at the full 40% death rate, with credit for the 20% already paid (and taper relief on the additional charge if applicable). CLTs also trigger 10-year periodic charges and exit charges within the trust itself.

The choice between gifting outright (PET) versus gifting into trust (CLT) is a major planning decision involving control, asset protection, beneficiary needs and trust taxation — typically requiring professional advice.

Taper Relief — The Sliding Scale

When a PET fails or a CLT is reassessed at death, taper relief reduces the effective IHT rate on the portion of the gift that exceeds the available NRB:

Worked Example — £500k Gift, 5.5 Years Before Death

Suppose Margaret gives her son £500,000 in cash in June 2020. She dies in December 2025, exactly 5.5 years later. Her remaining estate at death is worth £900,000. Margaret had made no other gifts in the seven years before this one.

1. Apply NRB to the gift first. £325,000 of the £500,000 gift is absorbed by the NRB. No tax on this slice, but the NRB is now fully used up.
2. Excess above NRB: £500,000 − £325,000 = £175,000 chargeable at the standard 40% = £70,000 baseline tax.
3. Taper relief at 5–6 years = 60% reduction. £70,000 × (100% − 60%) = £28,000 IHT due on the gift, payable by the recipient.
4. Estate calculation: Margaret's remaining £900,000 estate has zero NRB available (already absorbed by the failed PET). The whole £900,000 is taxed at 40% = £360,000 IHT on the estate.
5. Total family IHT bill: £28,000 (son) + £360,000 (estate) = £388,000.

Had Margaret survived another 18 months, the gift would have dropped out entirely, the £325,000 NRB would be restored against her estate, and total IHT would have fallen to £230,000 — a £158,000 saving from those extra 18 months of life.

Annual Exemptions That Stack on Top

Several exemptions sit alongside the 7-year rule and require no waiting period. These can be combined and used every year:

• £3,000 annual exemption — total gifts up to £3,000 per tax year, immediately exempt. Unused allowance carries forward one year (max £6,000 in a single year).
• £250 small gifts allowance — to any number of different people each tax year, immediately exempt. Cannot be combined with the £3,000 exemption for the same recipient.
• Wedding / civil partnership gifts — £5,000 from each parent, £2,500 from each grandparent or remoter ancestor, £2,500 between bride/groom, £1,000 from anyone else. Must be made on or shortly before the day.
• Normal expenditure out of income — regular gifts from surplus income that do not reduce your standard of living are unlimited and immediately exempt. Patterns matter: monthly standing orders, annual insurance premiums, regular school fees all qualify.
• Spouse / civil partner gifts — unlimited where both are UK domiciled (or both non-domiciled). Limited to £325,000 lifetime where a UK-domiciled spouse gives to a non-domiciled partner, unless the partner elects to be treated as UK domiciled.
• Charity and political party gifts — fully exempt with no limit. A bequest of at least 10% of the net estate also reduces the IHT rate on the rest of the estate from 40% to 36%.
• Maintenance payments — for ex-spouses, minor children or dependent relatives.

A couple making maximum use of just the £3,000 annual exemption could shift £6,000 out of their combined estate each tax year — £42,000 over seven years — with no risk and no waiting period.

Gifts with Reservation of Benefit (GWR)

The GWR rules exist to stop people having their cake and eating it. If you give away an asset but continue to benefit from it, HMRC ignores the gift entirely for IHT — the asset stays in your estate at its date-of-death value, and the 7-year clock never starts.

The classic trap is the family home:

• Parent gifts house to children but continues to live there rent-free → full GWR, no IHT benefit at all.
• Parent gifts house and pays full market rent → no GWR (but rent is income to children, who may pay income tax).
• Parent moves out completely and never returns → clean gift, 7-year clock starts.

Even where GWR does not catch a transaction, a separate Pre-Owned Assets Tax (POAT) income-tax charge may apply to arrangements that try to sidestep the GWR rules — for example, certain home-loan or reversionary lease schemes. Bespoke advice is essential for any planning involving the family home.

Documentation — The Gift Diary

When you die, your executors must complete form IHT403 listing every gift made in the seven years before death, plus any earlier gifts with reservation of benefit. HMRC expects detail: date, recipient, asset description, market value at the time, source of funds, and any exemption claimed.

Executors are personally liable for IHT and can be penalised for inaccurate disclosure, so most will conduct a careful trawl through seven years of bank statements, looking for unusual outgoings. Save your family time and uncertainty by keeping a simple gift diary in life:

• Date of gift
• Recipient name and relationship
• Asset and value at date of gift
• Source (income vs. capital — vital for normal-expenditure claims)
• Exemption claimed (£3,000 annual, wedding, normal expenditure, etc.)

For normal-expenditure-out-of-income claims, also keep an annual income-and-outgoings schedule showing that the gifts came from surplus. HMRC frequently rejects these claims for lack of evidence.

Order of Gifts — A Counter-Intuitive Trap

When death occurs within seven years, gifts are matched against the £325,000 NRB in strict chronological order — earliest gift first. This produces some counter-intuitive results:

• An early small gift can absorb part of the NRB, pushing a later, larger gift into the taxable zone.
• Gifts more than seven years before death drop out completely — they do not consume any NRB.
• The order of gifting matters: making a small £20,000 gift in year 1, then a large £400,000 gift in year 3, gives a different outcome than the reverse.
• Couples should think strategically about which spouse gifts what, because each has their own NRB and the surviving partner can inherit the deceased's unused portion.

For estates approaching the IHT threshold, mapping the chronology of all intended gifts — with a professional adviser running the numbers — is often more valuable than the gifts themselves.

Planning Strategies

1. Gift early. Time on the right side of the 7-year clock is the most valuable IHT asset you have. £100,000 gifted at age 70 versus age 78 makes a £40,000 difference in expected IHT.
2. Use exemptions every year. £3,000 annual exemption × two spouses × 10 years = £60,000 shifted with no risk and no waiting period.
3. Document normal-expenditure-from-income gifts. This is the single most under-claimed IHT exemption.
4. Consider 7-year decreasing-term life insurance written in trust. Cheap insurance can fund the worst-case IHT bill on a failed PET, paid directly to the recipient without forming part of the estate.
5. Choose the right vehicle. PETs offer simplicity; CLTs (trusts) offer control and asset protection but cost 20% upfront on amounts above the NRB.
6. Avoid GWR traps with the family home. Never gift your house and continue to live in it rent-free.
7. Use both spouses' NRBs. A married couple can shelter £650,000 between them on lifetime gifts before any IHT exposure arises.

HMRC References

• IHT400 — full Inheritance Tax account for the estate.
• IHT403 — schedule of gifts and other transfers of value in the 7 years before death.
• IHT100 — chargeable lifetime transfers (CLTs) and 10-year trust charges.
• IHTM14000 series — HMRC's Inheritance Tax Manual on lifetime transfers, taper relief and exemptions.
• IHTM14231–14250 — guidance specifically on the normal-expenditure-out-of-income exemption.

Frequently Asked Questions