Gifts and the Seven-Year Rule

The seven-year rule is the most misunderstood thing in estate planning. Very few people have it quite right, and the gap between what they think it does and what it does can cost a family a great deal.

This is our reference page on gifting. For the wider picture read Inheritance Tax Mitigation, and for how we sequence the planning, Inheritance Tax: The Squiggle Approach.

What counts as a gift

A gift is anything of value that leaves your estate, and that includes value you lose by selling cheaply: sell your £400,000 house to your daughter for £200,000 and you have made a £200,000 gift. Anything left in your Will is not a gift; that is part of your estate. Business and agricultural property carry their own reliefs, covered in Business and Agricultural Relief.

Potentially exempt transfers and the seven-year clock

Most outright gifts from one individual to another are potentially exempt transfers, or PETs. "Potentially" is doing the work: the gift is fully exempt if you live seven years from the date you made it, and comes back into the reckoning if you do not. GOV.UK covers this in Rules on giving gifts.

• The clock runs from the date of the gift, not from the start of the tax year.
• The gift must be outright. Gifts into most trusts are not PETs, and neither are gifts you still benefit from.
• Anniversaries count forward. A gift on 6 July 2013 and a death on 6 July 2017 sit in the 4 to 5 year band.

Taper relief, and the trap

Taper relief does not reduce the value of the gift. It reduces the tax on the gift. HMRC's Inheritance Tax Manual calls it "a percentage reduction in the tax which would otherwise be payable", and says it "does not reduce the capital value of the transfer".

It also only helps where there is tax for it to reduce. The gift, added to earlier chargeable gifts, must exceed the available nil rate band of £325,000, frozen until 5 April 2031. Below that, surviving five years rather than two makes no difference at all to a £50,000 gift.

Where tax is due, these percentages of the full rate stay payable:

• Under 3 years: 100% of the tax, an effective rate of 40%.
• 3 to 4 years: 80%, an effective 32%.
• 4 to 5 years: 60%, an effective 24%.
• 5 to 6 years: 40%, an effective 16%.
• 6 to 7 years: 20%, an effective 8%.
• 7 years or more: no tax on the gift.

A worked example: the taper trap

Margaret is not married, so only her own £325,000 nil rate band is available. She gives her daughter Claire £400,000 in June 2020 and dies in September 2026, six years and three months later.

• £75,000 of the gift sits above the nil rate band. Tax at 40% is £30,000.
• She survived 6 to 7 years, so 20% is payable: £6,000, and Claire is asked for it, not the estate.

Taper has not shrunk the gift to £80,000. The whole £400,000 counted first against the nil rate band, so Margaret's £325,000 is used up and the rest of her estate is taxed from the first pound, subject only to the residence nil rate band. Had she given £300,000, taper would do nothing at all however long she survived, and that £300,000 would still use £300,000 of her allowance. A hypothetical example only.

The order gifts are set against the nil rate band

Gifts are taken oldest first, and use up the nil rate band before the estate gets near it. HMRC's guidance on working out Inheritance Tax due on gifts sets out the method:

1. List every non-exempt gift made in the seven years before death, oldest first.
2. Keep a running total of their values at the date each was made.
3. Find where the total passes £325,000. Tax is due on the part of the gift that took it over, and on every gift after that. Whatever is left passes to the estate.

So the earliest gift eats the allowance first, and that is usually the gift the donor survived longest. The gift with the best taper position is the one sheltered, and the most recent gifts face the tax.

Who actually pays

Where tax is due on a failed PET, the person who received the gift is primarily liable for it, not the estate. HMRC's own form says the recipients "are liable to pay the tax due on them". Say that out loud when you make a large gift.

Executors are not off the hook. If the tax is still unpaid twelve months after the end of the month in which you died, HMRC can look to your personal representatives, up to the value of the assets they hold. See Estate Administration.

Gifts that are exempt straight away

These leave your estate the moment you make them.

The annual exemption

£3,000 each tax year (6 April to 5 April), to one person or split between several. Unused annual exemption carries forward one tax year only, so the most you can use in a single year is £6,000, and it cannot be stockpiled beyond that.

Small gifts

£250 per person per tax year, to as many people as you like. It cannot be combined with another exemption for the same person.

Wedding and civil partnership gifts

• £5,000 if you are a parent of one of the couple.
• £2,500 if you are a grandparent or more distant ancestor, or one of the couple giving to the other.
• £1,000 in any other case.

The gift must be made on or shortly before the ceremony and take effect when it happens; a gift afterwards does not qualify. It combines with your annual exemption, but not with small gifts.

Spouses, civil partners and charity

Gifts to your spouse or civil partner are exempt without limit, provided they live in the UK permanently. Gifts to UK charities are exempt too, and leaving 10% or more of your net estate to charity reduces the rate on the rest from 40% to 36%.

Normal expenditure out of income

The most underused exemption there is: unlimited, immediate, and lost far more often through missing paperwork than through failing the test. HMRC's conditions are at IHTM14231, and all three must be met.

1. The gift formed part of your normal expenditure. "Normal" means normal for you, not for the average person. HMRC looks for a pattern in the frequency, the amounts, who received the gifts and why. A single gift can qualify if it is genuinely the first of a pattern and you have evidence.
2. It was made out of income. Net income after income tax, year by year. Salary, pensions, rent, interest and dividends count; capital does not, and HMRC treats income kept more than about two years as capital.
3. It left you enough income to maintain your usual standard of living. If you had to dip into capital for ordinary living costs, the exemption fails, in whole or in part.

The last page of form IHT403 asks your executors for your income and expenditure for every tax year in which gifts were made, then the surplus, then the gifts. Keep that schedule yourself, year by year to 5 April.

Gifts with reservation of benefit

Giving the house to the children and carrying on living in it is the most common piece of DIY estate planning in the country, and it does not work.

The gift with reservation rules were introduced in 1986 for exactly this reason. If you give something away but keep the benefit of it, the asset is treated as still part of your estate when you die, valued at that date, however long ago you handed it over. The clock never starts. Paying full market rent to the new owner can end the reservation and start the clock, but the rent must be genuine, and it is taxable income in your child's hands.

Pre-owned asset tax. If an arrangement sidesteps those rules, there is a second line of defence. The pre-owned assets charge is an income tax charge on the benefit of still enjoying something you used to own, or something bought with money you provided. It reaches land and buildings, chattels and certain intangible assets. You can elect for Inheritance Tax instead, on form IHT500, by 31 January after the tax year you became liable, never after death.

Giving assets away to reduce a future care fee assessment is a different question with different rules, and the seven-year rule has no part in it. Read Care Fees and Your Home.

Chargeable lifetime transfers and the 14-year shadow

Gifts into most trusts are not PETs. They are chargeable lifetime transfers, taxed straight away at 20% on anything above your available nil rate band where the trustees pay the tax. Die within seven years and the rate is recalculated at 40%, with credit for what was paid.

Hence the 14-year shadow. To work out the tax on a failed PET you cumulate chargeable transfers made in the seven years before that gift, so a gift made six years and eleven months before death can pull in a trust transfer made almost fourteen years before it. If a trust is under discussion, read Do I Need a Trust?.

What records to keep

Every exemption here must be evidenced after your death by someone who was not there when you made the gift. Keep one running list, noting for each gift the date, what you gave and what it was worth, who received it, and which exemption you are relying on. Keep it with your Will and tell your executors it exists: they complete form IHT403, and they carry the risk if gifts surface later.

Common mistakes

Believing taper relief shrinks the gift. It reduces the tax, and only where tax is due. A gift inside the nil rate band gets no benefit at all.

Assuming the estate pays. The recipient of a failed PET is primarily liable. Tell them at the time.

Giving the house away and staying put. Without full market rent this is a gift with reservation, and the clock never starts.

Giving away more than you can spare. A gift cannot be unwound because you need the money later. Work out what the rest of your life will cost, including care, first.

Forgetting the pension change. Unused pension funds come into Inheritance Tax for deaths on or after 6 April 2027 under Finance Act 2026. Read Pensions and Inheritance Tax.

Questions? Book a free call

These rules are simple to state and easy to get wrong, and a conversation early on saves a lot of bother later. Pick a time that suits you and your local Squiggle consultant will call you. No charge, no pressure, just a friendly chat. Book a call or call 01233 659 796.

Talk to Squiggle: 01233 659 796 | hello@squiggleconsult.co.uk | www.squiggleconsult.co.uk | Book a free call: meet.squiggleconsult.co.uk

The nil rate band is £325,000 and the residence nil rate band is £175,000. Both are frozen until 5 April 2031 under Finance Act 2026 section 72. Squiggle Consult are estate planning consultants, not financial advisers, and nothing here recommends a gift or a product. This factsheet is general information for England and Wales, not legal, tax or financial advice, and the rules can change. Please take advice about your own circumstances. Last reviewed: August 2026.