The Seven Year Rule on Gifts Explained
How the seven year rule and taper relief affect inheritance tax on gifts you make during your lifetime.
In short
- Gifts to individuals are 'potentially exempt transfers' (PETs) and become fully exempt after seven years
- If you die within seven years, the gift may be added back into your estate for inheritance tax
- Taper relief reduces the tax rate on gifts made between three and seven years before death
- Taper relief only reduces tax on the gift itself, not the value transferred
- Some gifts, such as those to a spouse, civil partner or charity, are exempt regardless of timing
- Keeping records of gifts, dates and values makes life much easier for your executors
One of the most common questions about inheritance tax is whether giving money away during your lifetime keeps it out of your estate. The answer usually depends on the seven year rule: gifts to individuals are potentially exempt, meaning they fall outside your estate entirely if you survive seven years from making them.
If you die within seven years, the gift can still be counted back into your estate for inheritance tax purposes, though taper relief may reduce the tax due on larger gifts the longer you survived. Understanding how this works matters if you are thinking about giving away money or assets now rather than leaving everything in your will.
This is an area where getting the detail wrong can be expensive for your beneficiaries, so this guide explains the mechanics plainly. For anything beyond simple cash gifts, take specialist tax advice. A will from My Posh Will (single will £69 one-off) deals with what happens to your estate at death, but it cannot control the tax treatment of gifts you make while alive.
What counts as a potentially exempt transfer
A potentially exempt transfer, or PET, is a gift made by an individual to another individual, or into certain types of trust, that is not immediately chargeable to inheritance tax. Most everyday gifts of cash, property or other assets between family members fall into this category. The gift becomes entirely free of inheritance tax provided you survive seven years from the date you made it.
If you die within those seven years, the gift is brought back into your estate for calculating inheritance tax, using its value at the date it was given rather than at death. This can catch families out, particularly with gifts of property or investments that have grown in value since the gift was made.
How taper relief works
Taper relief only applies once the value of gifts made in the seven years before death exceeds the nil rate band, currently £325,000. It reduces the rate of inheritance tax charged on the gift itself, not the amount of the gift, and it only becomes relevant once tax is actually due.
The relief works on a sliding scale: 0 to 3 years before death there is no reduction and tax is charged at the full 40%, 3 to 4 years gives a 20% reduction, 4 to 5 years a 40% reduction, 5 to 6 years a 60% reduction, and 6 to 7 years an 80% reduction. Beyond seven years the gift is exempt entirely.
A common misunderstanding is that taper relief reduces the value of the gift for estate purposes. It does not. It only reduces the tax bill on that gift, and only where tax was due in the first place.
- 0 to 3 years: no relief, tax at full rate
- 3 to 4 years: 20% reduction in tax due
- 4 to 5 years: 40% reduction
- 5 to 6 years: 60% reduction
- 6 to 7 years: 80% reduction
- 7+ years: fully exempt
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Gifts that are exempt regardless of the seven year rule
Certain gifts fall outside the seven year rule entirely. Transfers between spouses or civil partners are exempt regardless of amount or timing, provided both are UK domiciled (special rules apply otherwise). Gifts to registered charities are also exempt, as are small gifts up to £250 per person per tax year, wedding gifts within set limits, and gifts that form part of normal expenditure out of income.
You also have an annual exemption of £3,000 per tax year, which can be carried forward one year if unused. These exemptions sit alongside, rather than instead of, the seven year rule for larger gifts.
Reservation of benefit: the trap to avoid
A gift only counts as fully given away for inheritance tax purposes if you give up all benefit from it. If you give away your house but continue to live in it rent-free, HMRC treats this as a 'gift with reservation of benefit', and the property remains part of your estate for tax purposes regardless of how long you survive afterwards.
This rule catches out families who try to give away the family home to reduce inheritance tax while the giver carries on living there. There are ways to structure this properly, such as paying a market rent, but they need careful, specialist advice before acting, not after.
Keeping records for your executors
Because gifts within seven years of death affect the inheritance tax calculation, your executors need to know what you gave, to whom, and when. Without records, they may struggle to complete the inheritance tax account accurately, which can delay probate and cause disputes between beneficiaries about who bears any resulting tax.
A simple written log kept alongside your will, noting the date, recipient, asset and value of any significant gift, is one of the most practical things you can do to make life easier for the people administering your estate later.
Questions people ask
Related guidance
- Inheritance Tax and Wills ExplainedAn overview of how inheritance tax and your will interact, and the main allowances that reduce a bill.
- What Is the Inheritance Tax Threshold?An explanation of the nil rate band, the residence nil rate band, and how transfers between spouses affect them.
- Are Gifts in a Will Subject to Inheritance Tax?How gifts made under a will are taxed, and the difference between will gifts and lifetime gifts.
- How Is an Estate Valued for Inheritance Tax?A guide to how executors value an estate's assets and liabilities for inheritance tax purposes.
- Gifting Money Before Death: What You Need to KnowLifetime gifts can reduce inheritance tax, but rules and risks apply.
More in Tax and estates.
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This guidance covers the law of England and Wales and is general information, not legal advice about your circumstances. The rules in Scotland and Northern Ireland differ.