The seven-year rule on gifts before death is one of the most important principles in inheritance tax planning, and one of the most frequently misunderstood. Under the Inheritance Tax Act 1984 (IHTA 1984), most outright gifts between living individuals — known as potentially exempt transfers or PETs — become permanently exempt from inheritance tax only if the donor survives for seven full years after making the gift. If the donor dies within that seven-year window, the gift may be brought back into the estate and taxed, though a relief known as taper relief can reduce the bill on gifts made more than three years before death.
Understanding how the seven-year rule operates is vital both for people planning their estates and for executors who must identify and report all qualifying gifts when completing the IHT400 after death. Overlooking a large gift can result in HMRC raising an enquiry, charging interest, and imposing penalties for an inaccurate return. Equally, knowing which gifts are immediately exempt — annual exemptions, gifts out of income, and small gift allowances — allows people to make regular, effective transfers to family members without any inheritance tax risk at all.
This guide explains the seven-year rule, how taper relief works, and which gifts fall outside the rule entirely. For a comprehensive overview of how inheritance tax is calculated on the whole estate, see our inheritance tax guide. For guidance on the estate administration process, see estate administration.
Plain-English guide written by Simon Jenkins — covering every stage of the probate process.
What Are Potentially Exempt Transfers (PETs)?
A potentially exempt transfer is any outright gift of money or assets from one individual to another individual — or to certain types of trust — made during the donor’s lifetime. The word potentially captures the key point: the gift is not immediately taxable, but it is not immediately exempt either. Its tax status depends entirely on whether the donor survives for seven years after making it. If they do, the gift falls completely out of the inheritance tax calculation. If they die within seven years, the gift is pulled back into the cumulative estate total and may attract tax.
Under ss.3A and 7 IHTA 1984, when a PET fails (that is, the donor dies within seven years), the value of the gift is added back to the estate for the purpose of calculating the nil-rate band. The PETs are assessed in chronological order, with the most recent gifts using up the nil-rate band first. If the nil-rate band is exhausted by earlier gifts, later ones may be taxed at the full 40% rate. The executor is responsible for identifying all PETs made in the seven years before death and reporting them on schedule IHT403 (gifts and other transfers of value).
How Taper Relief Reduces IHT on Failed PETs
Taper relief under s.7(4) IHTA 1984 reduces the amount of inheritance tax payable on gifts that fail because the donor died between three and seven years after making them. The relief operates as a percentage reduction on the tax charge attributable to the gift — not on the value of the gift itself. The taper percentages are:
- Gift made 0 to 3 years before death: no taper relief — full 40% rate applies.
- 3 to 4 years before death: 20% taper — effective IHT rate of 32%.
- 4 to 5 years before death: 40% taper — effective IHT rate of 24%.
- 5 to 6 years before death: 60% taper — effective IHT rate of 16%.
- 6 to 7 years before death: 80% taper — effective IHT rate of 8%.
- More than 7 years before death: 100% exempt — no IHT.
It is important to note that taper relief only reduces the tax on the amount of the gift that actually exceeds the nil-rate band. If the gift itself falls within the nil-rate band — because the deceased had not made other substantial gifts that have eaten into it — taper relief has no effect because no tax is payable on that gift anyway. HMRC provides official guidance on inheritance tax and gifts on GOV.UK.
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Annual Exemption, Small Gifts, and Other Immediately Exempt Gifts
Not every gift is a PET. Several categories of lifetime gift are immediately exempt from inheritance tax, regardless of when the donor dies. The most important are:
- Annual exemption — each person can give away up to £3,000 per tax year free of inheritance tax. Any unused annual exemption from the previous year can be carried forward for one year only, giving a potential £6,000 in the first year of generous gifting.
- Small gift exemption — gifts of up to £250 per recipient per year to any number of individuals are immediately exempt, provided the recipient has not also received part of the annual exemption in the same year.
- Wedding or civil partnership gifts — parents can give up to £5,000, grandparents up to £2,500, and others up to £1,000 free of IHT in connection with a wedding or civil partnership ceremony.
- Gifts to charities, political parties, and housing associations — immediately exempt under s.23 IHTA 1984.
- Gifts between spouses or civil partners — completely exempt under s.18 IHTA 1984, subject to the domicile rules for non-UK domiciled recipients.
Gifts Out of Income: The Normal Expenditure Exemption
One of the most powerful but least-used inheritance tax exemptions is the normal expenditure out of income exemption under s.21 IHTA 1984. Where a person regularly makes gifts out of their after-tax income — for example, paying a grandchild’s school fees, contributing to a child’s mortgage, or funding a family member’s pension — those gifts are immediately exempt provided three conditions are met: the gifts are habitual and form part of a regular pattern; they are made out of income (not capital); and after making them, the donor has sufficient income left to maintain their usual standard of living.
This exemption has no upper limit, making it one of the most valuable tools in estate planning for people with substantial income. However, it requires careful documentation. Executors claiming the exemption on form IHT403 must show HMRC a schedule of income, expenditure, and gifts over several years to demonstrate the pattern. Poor record-keeping is the most common reason valid claims fail. For guidance on how to administer the estate once the IHT position has been established, see our probate process guide.
What Executors Must Do: Reporting Gifts on IHT403
When completing the IHT400 after death, executors must identify and list all gifts made in the seven years before death on supplementary form IHT403. This requires them to search the deceased’s bank statements, financial records, and correspondence for any outright transfers of money or assets. Relatives and friends who received gifts may also need to be contacted, as the deceased’s records may be incomplete.
For each gift, the executor must record: the date; the recipient’s name and address; the nature and value of the asset transferred; any consideration received; and any exemption claimed. HMRC can and does cross-reference with bank records, particularly for large cash transfers, and unexplained movements of money in the years before death are a common trigger for enquiries. Professional help with IHT400 preparation can significantly reduce the risk of errors and enquiries.
What is the 7-year rule for inheritance tax?
The 7-year rule means that most lifetime gifts between individuals are potentially exempt from inheritance tax, but only if the donor survives for seven full years after making the gift. If the donor dies within seven years, the gift may be brought back into the estate and taxed, though taper relief can reduce the charge on gifts made between three and seven years before death.
What is taper relief on inheritance tax?
Taper relief reduces the IHT charge on gifts made between three and seven years before death. It operates as a percentage reduction on the tax attributable to the gift: 20% for gifts 3–4 years before death, rising to 80% for gifts 6–7 years before death. Taper relief only helps where the gift itself exceeds the available nil-rate band.
How much can I give away each year free of inheritance tax?
Each person has an annual exemption of £3,000 per tax year, with unused allowance from the previous year carried forward once. Gifts of up to £250 per person per year to any number of individuals are also exempt, and regular gifts out of surplus income can be immediately exempt under the normal expenditure out of income rule.
Do I need to report gifts on the IHT400 if they are under the nil-rate band?
Yes. All gifts made in the seven years before death must be listed on form IHT403, regardless of whether they give rise to a tax charge. This is because the gifts affect the calculation of the available nil-rate band and must be checked against the exemptions claimed. Failing to report gifts is a common cause of HMRC enquiries.
Are gifts to a spouse exempt from inheritance tax?
Yes, gifts between UK-domiciled spouses and civil partners are fully exempt from inheritance tax under s.18 IHTA 1984, whether made during lifetime or on death. Where the recipient spouse is not UK-domiciled, the exemption is limited but a lifetime election can be made to be treated as UK-domiciled for IHT purposes.
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📊 Get Fee EstimateWritten by Simon Jenkins, SRA 167489, Solicitor at Curtis Legal Limited (SRA 450129). For advice on lifetime gifting and inheritance tax planning, call freephone 0800 214 216 or request a same-day callback.
