IHT 7-Year Rule: Gifts, Taper Relief, Exemptions

How the 7-Year Rule Works

When you give away money, property, or other assets during your lifetime, HMRC treats the gift as a potentially exempt transferpotentially exempt transfer: A lifetime gift that becomes fully Inheritance-Tax-free if you survive 7 years. Die within 7 years and it counts back against your estate, with taper relief on the tax after year 3. (PET). If you survive for 7 years after making the gift, it becomes fully exempt from Inheritance Tax - no matter how large it was.

If you die within 7 years, the gift is added back into your estate for IHT purposes. The 7-year clock starts on the date of the gift, not the date of your death.

This rule applies to outright gifts to individuals. Gifts into most trusts are treated differently - they are chargeable lifetime transfers (CLTs) and may be taxed at 20% immediately if they exceed the nil-rate band.

The Nil-Rate Band: Your £325,000 Threshold

Inheritance Tax is charged at 40% on the value of an estate above the nil-rate bandThe slice of an estate taxed at 0% for Inheritance Tax - £325,000 for 2026/27, frozen to April 2031. A separate £175,000 residence nil-rate band can apply when a home passes to direct descendants. (NRB), which has been frozen at £325,000 since 2009 and will remain frozen until April 2031 (extended a further year at the Autumn Budget 2025). A separate residence nil-rate band (RNRB) of £175,000 applies when you pass a home to direct descendants, but this only covers the death estate - it does not shelter lifetime gifts.

When you die within 7 years of making a gift, the gift uses up your nil-rate band first. If the total value of gifts made in the 7 years before death exceeds £325,000, the excess is taxed - and the remaining estate may lose its NRB entirely.

Taper Relief: The Sliding Scale

Taper reliefA reduction in the Inheritance Tax RATE (not the gift's value) on gifts made 3 to 7 years before death - from 32% down to 8% - and only on the part of gifts above the nil-rate band. reduces the IHT rate on gifts made between 3 and 7 years before death. It only applies where the cumulative value of gifts exceeds the £325,000 nil-rate band - below that threshold, there is no tax to taper.

A common misconception is that taper relief reduces the value of the gift. It does not. It reduces the rate of tax charged on the gift. The full value of the gift still counts against the nil-rate band.

Worked Example: A Gift That Outlives the Threshold

David gives his daughter £400,000 in July 2020. He dies in September 2025 - 5 years and 2 months after the gift. He made no other gifts in the preceding 7 years.

The gift uses up the full £325,000 nil-rate band, leaving £75,000 taxable. Because the gift was made 5 to 6 years before death, taper relief applies at 16% instead of the full 40%.

IHT on the gift: £75,000 × 16% = £12,000. Without taper relief, the bill would have been £75,000 × 40% = £30,000. The daughter saves £18,000.

Note that David's death estate now has no nil-rate band remaining - it was fully consumed by the lifetime gift. His estate will be taxed at 40% from the first pound (though the £175,000 RNRB may still apply if a home passes to a direct descendant).

Gifts You Can Make Without Starting the Clock

Several exemptions let you give away money every year with no 7-year risk at all. These gifts are immediately exempt - they are never added back to your estate regardless of when you die.

Annual exemption: £3,000 per tax year, to one person or split between several. You can carry forward one unused year, giving a maximum of £6,000 in a single year if you did not use last year's allowance.

Small gifts: up to £250 per recipient per tax year, to as many people as you like - provided you have not also used your annual exemption on the same person.

Wedding or civil partnership gifts: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else.

Normal expenditure out of income: regular gifts made from your after-tax income (not capital) that do not reduce your standard of living. There is no upper limit. This exemption is powerful but must be evidenced - HMRC will want to see a pattern of regular payments and proof that you could afford them from income alone. Keeping a written record is strongly advised.

Gifts between spouses or civil partners: unlimited and always exempt, provided the receiving spouse is UK-domiciled. If your spouse is non-UK domiciled, the exemption is capped at £325,000.

Gifts to charities and political parties: fully exempt with no cap.

Why This Matters More from April 2027

From 6 April 2027, unused defined contribution pension pots will be included in your estate for IHT purposes. For many families, this will push estates above the £325,000 nil-rate band for the first time - making the 7-year gifting rule significantly more relevant.

If you are considering making larger gifts to reduce your estate, the sooner you start the clock the better. A gift made today would be fully exempt by April 2033. A gift delayed until 2028 would not clear the 7-year window until 2035.

We have built an IHT Planner that simulates how the 2027 pension inclusion rules affect your estate. Use it alongside this guide to understand your exposure.

Related: model your position with the IHT planner; and from April 2027 unused pensions count too - see pensions and the 2027 IHT change.