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The 7-Year Rule for Inheritance Tax Gifts Explained

· 25 min

Note: The following scenario is fictional and used for illustration.

Margaret, 68, gifted £200,000 to her son Daniel in 2019 to help him buy his first home in Manchester. She felt confident she'd live well beyond the 7-year mark—she was healthy, active, and her mother had lived to 92.

But when Margaret died unexpectedly from a stroke in 2024, just 5 years and 3 months after the gift, Daniel faced a shocking inheritance tax bill. The £200,000 gift was added back to Margaret's £350,000 estate, creating a total taxable estate of £550,000. After the £325,000 nil-rate band, £225,000 was subject to tax. Daniel owed £36,000 in inheritance tax on the gift alone (16% rate thanks to taper relief—without it, the bill would have been £90,000).

Margaret thought she was helping her son. She never imagined her generosity could backfire. And Daniel—who'd always been grateful for the deposit help—now faced selling investments to pay a tax bill his mother never intended.

With 31,500 UK estates paying inheritance tax in 2022-2023 (4.62% of all deaths) and total IHT liabilities reaching £6.70 billion, understanding the 7-year rule isn't optional—it's essential for anyone making significant gifts. Learn more about how to reduce inheritance tax legally in the UK.

This article will show you exactly how the 7-year rule works, what taper relief can save you, which gifts are exempt, and how to avoid the costly mistakes that catch out hundreds of families every year. For broader estate planning guidance, including how gifting fits into your overall strategy, see our comprehensive checklist.

Table of Contents

What Is the 7-Year Rule for Inheritance Tax?

The 7-year rule states that gifts made more than 7 years before your death are generally exempt from inheritance tax. Gifts made within 7 years may be taxable if your estate exceeds the £325,000 nil-rate band.

The legal basis for this rule comes from the Inheritance Tax Act 1984, Section 3A, which defines potentially exempt transfers. HMRC created this anti-avoidance mechanism to prevent deathbed gifting to dodge inheritance tax. The 7-year window is considered a reasonable period to distinguish genuine lifetime gifts from tax avoidance schemes.

What counts as a "gift" under these rules? Essentially, anything that reduces your estate's value:

  • Cash or money transfers
  • Property (houses, flats, land)
  • Shares and investments
  • Personal possessions (jewelry, art, vehicles)
  • Any transfer of value that leaves you poorer

According to HMRC statistics, 4.62% of UK deaths resulted in an inheritance tax charge in 2022-2023, affecting 31,500 estates with total liabilities of £6.70 billion. The average effective tax rate for these estates was 13%—significantly lower than the 40% headline rate due to exemptions and reliefs.

Here's a practical example: David, 72, gives his daughter £150,000 in 2020. If David dies in 2028 (8 years later), the gift is fully exempt and won't be counted as part of his estate. If he dies in 2026 (6 years later), the gift counts toward his estate and may be taxable, but taper relief will reduce the tax rate from 40% to 8%.

But not all gifts work the same way. Let's look at what makes a gift "potentially exempt."

How Potentially Exempt Transfers (PETs) Work in Practice

A potentially exempt transfer is a gift that becomes fully exempt from inheritance tax if you survive 7 years after making it. During those 7 years, the gift is "potentially" exempt—the exemption isn't confirmed until you've survived the full period.

Examples of PETs include:

  • Cash gifts to children or grandchildren (over the £3,000 annual exemption)
  • Gifting a property to a family member (assuming you move out and don't benefit—more on this later)
  • Transferring shares or investments to individuals
  • Large one-off gifts for house deposits, education, or weddings (beyond the specific exemptions)

What's NOT a PET? Gifts to discretionary trusts are treated as "chargeable lifetime transfers" with immediate tax implications if they exceed £325,000. Gifts to companies and gifts where you retain a benefit also don't qualify as PETs.

Here's how PETs are treated depending on timing:

If you survive 7+ years: The gift disappears from your estate entirely. No tax, no reporting required on your death.

If you die within 3 years: The full gift value is added back to your estate. Tax is charged at the full 40% rate if your estate exceeds the nil-rate band.

If you die 3-7 years later: Taper relief applies, reducing the tax rate based on how long you survived after making the gift.

Emma gifts £100,000 to her son in January 2021. This is a PET. If Emma dies in March 2024 (just over 3 years later), the £100,000 is added back to her estate but taper relief applies at 20%, reducing the tax rate to 32%. If she dies in February 2028 (7+ years later), the gift is completely exempt and won't be counted at all.

There's an important concept called the "running total" that affects how gifts are taxed. All gifts made in the 7 years before death are added up in chronological order, and the earliest gifts "use up" the nil-rate band first. This means later gifts might face higher tax rates even if they're smaller amounts.

The timing of your death relative to the gift date determines not just whether tax is due, but how much. That's where taper relief comes in.

Understanding Taper Relief: The Tax Discount for Longer Survival

Taper relief is a reduction in the inheritance tax rate on gifts made 3-7 years before death. It rewards you for surviving longer after making the gift, gradually reducing the tax burden on your beneficiaries.

Here's the critical clarification many people get wrong: taper relief does NOT reduce the value of the gift—it reduces the tax rate applied to the gift. If you gifted £100,000, it's still counted as £100,000 in your estate, but the percentage of tax charged on it goes down.

The taper relief rates from HMRC are:

Years between gift and death Tax rate on gift Effective taper relief
Less than 3 years 40% 0% relief
3-4 years 32% 20% relief
4-5 years 24% 40% relief
5-6 years 16% 60% relief
6-7 years 8% 80% relief
7+ years 0% 100% exempt

Let's work through a detailed example:

Sarah gifts £400,000 to her two children in 2020 (£200,000 each). She dies in 2025, exactly 5 years and 2 months later. Her remaining estate is worth £150,000.

Total estate for tax purposes = £150,000 (estate) + £400,000 (gifts) = £550,000

After the £325,000 nil-rate band, £225,000 is taxable.

Because Sarah survived 5-6 years, taper relief applies at 60%, meaning the effective tax rate is 16% (not the standard 40%).

Tax due = £225,000 × 16% = £36,000

Without taper relief, the tax would have been £225,000 × 40% = £90,000. Taper relief saved Sarah's children £54,000.

But here's an important caveat: if your total estate (including gifts) is below the £325,000 nil-rate band, taper relief doesn't help because no tax is due anyway.

For example, if Sarah's estate in the above scenario was only £50,000, the total would be £450,000. After the £325,000 threshold, only £125,000 would be taxable. Taper relief would reduce the tax to £20,000 (16% rate) instead of £50,000 (40% rate)—still a significant saving.

It's also worth noting that if the residence nil-rate band applies (an additional £175,000 for property left to direct descendants), it increases the total threshold to £500,000 for individuals or £1 million for married couples, further reducing potential tax liability.

Taper relief can save tens of thousands of pounds, but many gifts don't need to worry about the 7-year rule at all.

Which Gifts Are Completely Exempt from the 7-Year Rule?

Not all gifts are potentially exempt transfers. Several categories of gifts are immediately exempt from inheritance tax, regardless of when you die. These don't count toward your £325,000 nil-rate band and don't need to survive the 7-year period.

Annual Exemption (£3,000)

You can give away £3,000 per tax year (6 April to 5 April) completely tax-free. Unused annual exemption can be carried forward ONE year only. Married couples can each give £3,000, totaling £6,000 per year.

In 2023-24, James doesn't make any gifts. In 2024-25, he can give away £6,000 (£3,000 for the current year plus £3,000 carried forward from the previous year).

Small Gifts Allowance (£250 per person)

You can give up to £250 to as many people as you like in a single tax year. This is separate from the £3,000 annual exemption. However, you cannot combine these exemptions for the same person—you can't give someone £3,250 and claim both.

Susan gives £250 each to her 8 grandchildren at Christmas—all completely exempt from inheritance tax.

Wedding or Civil Partnership Gifts

Parents can give £5,000 per child getting married, grandparents can give £2,500 per grandchild, and anyone else can give £1,000. The gift must be made shortly before or on the wedding day.

When their daughter marries, both parents can give £5,000 each (£10,000 total) tax-free, in addition to their regular annual exemptions.

Regular Gifts from Surplus Income

This is one of the most powerful but underused exemptions. You can gift an unlimited amount if the gifts are:

  • Made from income (not capital or savings)
  • Part of a regular pattern (not one-off)
  • Don't reduce your standard of living

This requires excellent record-keeping to prove income, expenses, and the regularity of gifts. HMRC provides guidance on how to document these gifts properly.

Patricia receives £4,000 per month in pension income. After expenses of £2,500 per month, she gives her son £1,000 every month. This is exempt if she can prove it's regular and from surplus income, not from drawing down savings.

Gifts to Spouses or Civil Partners

Completely exempt with no limit if both partners are UK-domiciled. These transfers are not subject to the 7-year rule at all. However, if your spouse is non-UK domiciled, the lifetime limit is £325,000.

Gifts to UK-Registered Charities

Completely exempt with no limit. Additionally, if you leave 10% or more of your estate to charity, it reduces the inheritance tax rate on the rest of your estate from 40% to 36%.

Strategic Use of Exemptions

Use these exemptions FIRST before making larger potentially exempt transfers. If you want to give your son £50,000, structure it as:

  • £3,000 annual exemption (current year)
  • £3,000 carried forward (previous year)
  • £44,000 as a PET subject to the 7-year rule

This reduces the amount exposed to potential tax by £6,000, which could save £2,400 if you die within 7 years and your estate exceeds the nil-rate band.

Even with these exemptions, the most dangerous mistake isn't about timing—it's about continuing to benefit from what you've given away.

The Gift with Reservation of Benefit Trap (and How to Avoid It)

A gift with reservation of benefit (GWROB) occurs when you give something away but continue to benefit from it. HMRC treats this as if you never gave it away at all—it remains in your estate for inheritance tax purposes, regardless of how long you survive after the "gift."

The legal basis comes from Finance Act 1986, Section 102. Recent cases have shown that HMRC actively pursues these arrangements, leading to significant unexpected tax bills for families.

Common GWROB Scenarios

1. Gifting your home but continuing to live in it

This is the most common GWROB mistake. Michael gives his £400,000 house to his daughter Sophie in 2018, hoping to avoid inheritance tax. But Michael continues living in the house rent-free until his death in 2025.

Despite surviving 7 years, the house is still in his estate for inheritance tax purposes because he retained a benefit (free accommodation).

How to avoid this: Pay full market rent to the new owner(s) with proper documentation—a formal tenancy agreement, regular rent payments via bank transfer, and ensure the recipient declares the rental income on their tax return.

2. Giving away a holiday home but still using it

You give your cottage to your children but continue staying there for free several times a year. Even occasional use constitutes a reservation of benefit.

How to avoid this: Either don't use it at all, or use it only when the children are present as their genuine guests—not as a formality but with them actually hosting you.

3. Transferring assets into a trust but retaining control

Creating a trust with assets but remaining as a trustee with decision-making power or benefiting from the trust income.

How to avoid this: Use independent trustees and genuinely relinquish all control and benefit.

The Chugtai Case: A Real Warning

In the case of *Chugtai v HMRC* (2025), Mohammed Chugtai transferred a property into trusts more than seven years before his death. He later returned to live in the property while caring for his daughter.

Despite the transfers being made over seven years prior, HMRC ruled the gifts were GWROB because Chugtai continued to benefit from the property. His estate faced a £176,000 inheritance tax bill. The tribunal upheld HMRC's decision, emphasizing that you cannot retain benefits from assets you claim to have given away.

The Double Tax Trap

If you make a GWROB gift, you can face tax on the full property value at death PLUS potentially trigger capital gains tax issues. Neither the 7-year rule nor taper relief applies to GWROB.

How to Fix a GWROB Situation

If you've already made a GWROB gift, you have options:

  • Start paying full market rent (this creates a new PET, restarting the 7-year clock)
  • Move out entirely (also creates a new PET)
  • Get professional legal advice for complex situations

Understanding GWROB is crucial, but even legitimate gifts can create unexpected tax bills if you don't calculate correctly.

How to Calculate Inheritance Tax on Gifts Made Within 7 Years

When someone dies, their executor must calculate whether inheritance tax is due on gifts made in the previous 7 years. Here's the step-by-step process:

Step 1: List All Gifts in Chronological Order

Include all gifts made in the 7 years before death, excluding exempt gifts like those covered by the annual exemption, small gifts, or spousal transfers. Record the date of each gift, the recipient, and the value at the time of the gift (not the current value).

Step 2: Apply Exemptions to Each Gift

Deduct the £3,000 annual exemption from each year's gifts, plus any carried-forward exemption from the previous year. Also deduct wedding gifts, small gifts, and other applicable exemptions.

Step 3: Calculate the Estate Value

Total the value of everything owned at death (property, savings, investments, possessions), then subtract debts, funeral costs, and any exempt transfers to spouses or charities.

Step 4: Add Potentially Exempt Transfers to the Estate

Add the value of all PETs (after exemptions) to the estate total. Crucially, use the earliest gifts first to "fill up" the nil-rate band.

Step 5: Apply the Nil-Rate Band

The current nil-rate band is £325,000. If applicable, add the residence nil-rate band of £175,000 for property left to direct descendants. Married couples can combine unused nil-rate bands, potentially reaching £650,000 standard plus £350,000 residence.

Step 6: Calculate Tax on the Excess

Any amount over the nil-rate band is taxable at 40%, or a reduced rate if taper relief applies based on the timing of each gift.

Step 7: Determine Who Pays

Typically, the recipient of the gift pays the inheritance tax on that gift, not the estate—unless the will states otherwise.

Comprehensive Example

Robert dies in January 2025 with an estate valued at £200,000. In the 7 years before his death, he made these gifts:

  • March 2019: £50,000 to his son (5 years, 10 months before death)
  • July 2021: £150,000 to his daughter (3 years, 6 months before death)
  • December 2022: £20,000 to his grandson (2 years, 1 month before death)

Applying exemptions:

  • March 2019 gift: £50,000 - £3,000 (annual exemption) = £47,000 PET
  • July 2021 gift: £150,000 - £3,000 (annual exemption) = £147,000 PET
  • December 2022 gift: £20,000 - £3,000 (annual exemption) = £17,000 PET

Total estate for tax = £200,000 (estate) + £47,000 + £147,000 + £17,000 (gifts) = £411,000

Applying gifts chronologically to use the nil-rate band:

The estate value of £200,000 uses £200,000 of the £325,000 nil-rate band, leaving £125,000.

  • March 2019 gift (£47,000) fits entirely within the remaining £125,000 band → no tax
  • July 2021 gift (£147,000) is fully taxable because the nil-rate band is exhausted. Death occurred 3-4 years after the gift → taper relief at 20% applies → tax rate is 32%. Tax = £147,000 × 32% = £47,040
  • December 2022 gift (£17,000) is fully taxable. Death occurred less than 3 years after the gift → no taper relief → 40% rate. Tax = £17,000 × 40% = £6,800

Total inheritance tax due: £53,840

  • Robert's son pays: £0 (gift covered by nil-rate band)
  • Robert's daughter pays: £47,040
  • Robert's grandson pays: £6,800

The order matters significantly. Earlier gifts use up the nil-rate band first, which can mean later gifts face higher tax even if they're smaller amounts.

These calculations assume perfect record-keeping. But that's where many families fall down.

Common Mistakes That Cost Families Thousands in Unnecessary Tax

Even with good intentions, families make costly errors when gifting to reduce inheritance tax. Here are the mistakes that catch people out most often.

Mistake 1: Not Keeping Proper Gift Records

Without documentation of when gifts were made and their value, executors can't prove the timing to HMRC. In the absence of evidence, HMRC typically assumes gifts were made more recently than they actually were, resulting in higher tax bills.

Helen gave her son £80,000 in 2017 but didn't document it. When she died in 2024, her son had no proof of the gift date. HMRC treated it as if it was made within 3 years of death, resulting in £32,000 tax instead of £0 if the actual date could have been proven.

Mistake 2: Continuing to Benefit from Gifted Assets

As covered earlier, gifts with reservation of benefit remain in your estate regardless of timing. The Chugtai case shows that hundreds of families are caught out by this rule each year.

Mistake 3: Assuming Taper Relief Reduces the Gift Value

People mistakenly think a £100,000 gift made 5 years ago is now "worth" only £40,000 (with 60% relief). Wrong. The gift remains £100,000, but the tax rate drops from 40% to 16%.

Sarah thought her £200,000 gift made 5 years before her death would only count as £80,000 (20% of original). It counted as the full £200,000, but the tax rate on it was lower.

Mistake 4: Not Using Annual Exemptions First

Forgetting to use the £3,000 annual exemption means unnecessarily exposing that amount to the 7-year rule.

David gave his son £100,000 in one lump sum. If he'd structured it using his annual exemption first (£3,000 current year + £3,000 carried forward), only £94,000 would have been a PET.

Mistake 5: Gifting Too Late in Life

Making large gifts in your 70s or 80s significantly increases the risk of dying within 7 years. According to ONS data, life expectancy at 70 is roughly 15 years, but about 1 in 4 people aged 70 die before 80.

A better strategy: Start gifting earlier (in your 60s) when you're more likely to survive the 7-year period, or use the unlimited regular gifts from income exemption.

Mistake 6: Not Updating Your Will After Gifting

Your will still mentions assets you've given away, causing confusion and delays in probate.

Margaret's will said "I leave my house on Oak Street to my daughter." But she'd gifted it 5 years earlier. The executor had to prove the gift was legitimate, delaying probate by 8 months.

Mistake 7: Forgetting About Jointly Owned Property

You can only gift your share of jointly owned property (typically 50%), and you need the co-owner's consent.

Mistake 8: Not Considering Care Home Fee Implications

Local authorities can treat gifts as "deprivation of assets" if made to avoid care home fees, regardless of inheritance tax planning. This is a separate set of rules that can interact badly with IHT planning. Don't gift purely to avoid care costs—consult a solicitor.

Most of these mistakes are avoidable with proper planning, documentation, and professional advice when your situation is complex.

The single most important thing you can do is keep meticulous records.

Keeping Records of Your Gifts: What You Must Document

If you die within 7 years of making a gift, your executor must report the gift to HMRC and prove when it was made. Without proper records, HMRC will make assumptions that cost your family money—usually by treating gifts as more recent than they actually were.

What to Document for Every Gift

1. Date of the gift

Record the exact date (day/month/year). Use bank transfer confirmations, solicitor's completion statements for property, or signed deeds of gift.

2. Value of the gift at the time

  • For cash: Bank statement showing the amount transferred
  • For property: Professional valuation, estate agent's appraisal, or Land Registry records
  • For shares: Market value on the date of transfer
  • For possessions: Receipts, insurance valuations, or professional appraisals

3. Recipient details

Full name, relationship to you, address, and the reason for the gift (helpful for context but not legally required).

4. Evidence that you relinquished all benefit

For property gifts where you moved out: utility bills in your new address, lease or mortgage documentation. For property where you pay rent: tenancy agreement, rent payment records for at least 12 months, evidence the recipient declared rental income. For financial gifts: proof the recipient has control, such as statements showing the money in their account.

5. Which exemptions you're claiming

Note if you're using the annual exemption (£3,000) and which tax year it applies to. If using carried-forward exemption, confirm you didn't use it the previous year. For regular gifts from income, keep detailed income and expenditure records for at least 12 months showing the pattern.

6. Supporting correspondence

Keep letters to recipients explaining the gift, email confirmations, and solicitor's correspondence for property or trust transfers.

How to Organize Records

Create a "Lifetime Gifts" folder (physical or digital). Store all gift documentation together and maintain a gift log spreadsheet with columns for: date, recipient, relationship, gift type, value, exemption used, document reference, and notes.

Share the location of this folder with your executor and mention it in your will.

Review and update the folder annually, adding new gifts as you make them.

What Your Executor Needs

Your executor will need to complete HMRC Form IHT403 when reporting gifts made in the 7 years before your death. This form requires:

  • Date of each gift
  • Recipient details
  • Gift value
  • Relationship to you
  • Which exemptions applied
  • Whether taper relief applies

Example of Good Record-Keeping

Thomas creates a spreadsheet with columns for Date, Recipient, Relationship, Gift Type, Value, Exemption Used, Document Reference, and Notes. For each gift, he scans supporting documents (bank statements, valuations, letters) and saves them in a folder using a consistent naming convention like "2023-03-15_Sophie_House-Deposit.pdf".

His will states: "My executor will find my lifetime gift records in the filing cabinet, top drawer, blue folder labeled 'Gifts 2020-2025.'"

This takes about 10 minutes per gift but could save his children thousands of pounds in potential disputes with HMRC.

With proper understanding and documentation, the 7-year rule becomes a powerful estate planning tool, not a trap.

Frequently Asked Questions

Q: What is the 7-year rule for inheritance tax?

A: The 7-year rule states that gifts made more than 7 years before your death are generally exempt from inheritance tax. If you die within 7 years of making a gift, the gift may be included in your estate for tax purposes, though taper relief can reduce the tax after 3 years.

Q: How does taper relief work on inheritance tax gifts?

A: Taper relief reduces the inheritance tax rate on gifts made 3-7 years before death. At 3-4 years, you pay 32% (20% relief); 4-5 years, 24% (40% relief); 5-6 years, 16% (60% relief); and 6-7 years, 8% (80% relief). After 7 years, the gift is fully exempt.

Q: What is a potentially exempt transfer (PET)?

A: A potentially exempt transfer (PET) is a gift to an individual that becomes fully exempt from inheritance tax if you survive 7 years after making it. Under the Inheritance Tax Act 1984, Section 3A, PETs include gifts of money, property, and assets to individuals or certain trusts.

Q: Can I give away my house and still live in it?

A: Not without tax consequences. If you gift your home but continue living in it rent-free, it's classed as a 'gift with reservation of benefit' (GWROB). The property remains in your estate for inheritance tax purposes. You must pay full market rent and have proper documentation to avoid this.

Q: What gifts are exempt from the 7-year rule?

A: Gifts exempt from the 7-year rule include: transfers to spouses/civil partners, annual gifts up to £3,000 (can carry forward 1 year), small gifts up to £250 per person, wedding gifts (£5,000 to children, £2,500 to grandchildren, £1,000 to others), regular gifts from surplus income, and gifts to UK charities.

Q: Do I need to tell HMRC about gifts I make?

A: You don't need to report gifts immediately, but you should keep detailed records including dates, values, recipients, and evidence of market value. If you die within 7 years, your executor must report all potentially exempt transfers to HMRC when calculating inheritance tax liability.

Q: What happens if I die within 7 years of making a gift?

A: If you die within 7 years of making a gift over £3,000, the gift value counts towards your £325,000 nil-rate band. If your total estate plus gifts exceeds this threshold, inheritance tax at 40% (or reduced with taper relief after 3 years) applies to the amount over the threshold.

Conclusion

Key takeaways:

  • The 7-year rule makes gifts exempt from inheritance tax if you survive 7 years; taper relief reduces tax from years 3-7
  • Use exempt gifts first (£3,000 annual exemption, £250 small gifts, wedding gifts, regular income gifts) before making large potentially exempt transfers
  • Never continue benefiting from gifted assets—gifts with reservation of benefit stay in your estate forever
  • Keep detailed records of every gift: date, value, recipient, exemption used, and proof you relinquished benefit
  • Update your will after making significant gifts to reflect your reduced estate and clarify your executor's record-keeping duties

Margaret's story at the start didn't have to end with an unexpected tax bill. With proper planning—using exemptions strategically, documenting gifts carefully, and ensuring her will reflected her gifting strategy—she could have passed her wealth to Daniel without the £36,000 burden. The 7-year rule isn't a gamble; it's a tool that works when you understand it and plan ahead.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.

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