The 7-year rule in one paragraph: a lifetime gift to a person becomes a Potentially Exempt Transfer (PET). Survive 7 years and it's outside your estate, free from IHT. Die within 7 years and the gift is added back to your estate; the IHT due on it tapers at 20% per year between years 3 and 7. Critical misunderstanding: taper relief reduces the tax, not the value of the gift — and it only applies if the gift exceeds the nil-rate band.
The categories of lifetime gift
- Potentially Exempt Transfer (PET): a gift to an individual (not a trust, with limited exceptions). Free of IHT if you survive 7 years.
- Chargeable Lifetime Transfer (CLT): a gift to a discretionary trust. IHT due immediately at 20% on the excess above the nil-rate band, with potential further charge if you die within 7 years.
- Exempt transfers: immediate, no 7-year rule applies. Spouse/civil partner transfers (unlimited UK-domiciled), gifts to charities, gifts to political parties, gifts to qualifying employer trusts. Annual £3,000 exemption, small gifts (£250/person/year), wedding gifts (£5,000 from parent etc.), and "gifts out of normal income" all fall in this category.
How the 7-year clock works
The clock starts on the date of the gift. To work out the IHT impact on death:
- List all PETs made in the 7 years before death, in chronological order.
- For each PET, the £325,000 nil-rate band is used against the earliest gift first.
- Any PET exceeding the available nil-rate band is taxed at 40%, reduced by taper relief if the gift was made between 3-7 years before death.
- The full estate value at death is then assessed against the remaining nil-rate band.
This means: large gifts made early can reduce the nil-rate band available to later gifts and the death estate, even though the early gift itself may be partly or fully tapered.
Taper relief: reduces tax, not value
| Years between gift and death | % of tax payable | Effective rate on excess |
|---|---|---|
| 0-3 years | 100% | 40% |
| 3-4 years | 80% | 32% |
| 4-5 years | 60% | 24% |
| 5-6 years | 40% | 16% |
| 6-7 years | 20% | 8% |
| 7+ years | 0% | 0% |
Crucial subtlety: taper relief only kicks in for gifts that exceed the nil-rate band, because gifts below the band don't generate any IHT to taper in the first place. Many people misunderstand this and assume a £200,000 gift made 5 years before death is "60% reduced" — it's not, it's fully covered by the £325,000 nil-rate band and entirely tax-free.
Worked example 1: small estate, gift fully covered by NRB
Father gives £200,000 to son in 2020. Father dies in 2024 (4 years later). At death, father's estate is £400,000.
- The £200,000 gift uses £200,000 of the £325,000 nil-rate band first.
- Remaining nil-rate band: £125,000.
- Estate £400,000 - £125,000 nil-rate band = £275,000 taxable at 40% = £110,000 IHT.
- The gift itself: no tax (under nil-rate band). Taper relief is irrelevant.
The 7-year rule cost the estate £110,000 of IHT that wouldn't have arisen if the gift had been made >7 years before death. Had father survived to 2027, the £200,000 PET would have dropped off and the £325,000 nil-rate band would cover most of the estate.
Worked example 2: large gift exceeding NRB, taper relief applies
Mother gives £600,000 to daughter in 2019. Mother dies in 2024 (5 years later). At death, mother's estate is £500,000.
- The £600,000 gift uses £325,000 nil-rate band; excess of £275,000 is taxable.
- Tax on excess at 40% = £110,000.
- Taper relief: 5 years means 40% of tax payable. So £110,000 × 40% = £44,000 tax due on the gift. Daughter pays this (the recipient is liable for tax on a PET that fails the 7-year survival).
- Estate of £500,000: nil-rate band already fully used by the gift. Estate taxed in full at 40% = £200,000 IHT.
- Total IHT: £44,000 + £200,000 = £244,000.
The Residence Nil Rate Band (RNRB) interaction
The RNRB (£175,000 in 2026/27) applies separately to a qualifying residence passed to direct descendants. It is NOT used against lifetime gifts — only against the death estate.
However, the RNRB tapers above £2m of total estate. Large lifetime gifts that reduce the estate below £2m can preserve the RNRB; gifts already counted in the "estate" for taper purposes (depending on the specific computation) may not help.
The four 7-year-rule mistakes that cost families money
- Believing taper relief reduces gift value. It reduces tax, only on gifts above the NRB. A £200,000 gift made 4 years before death isn't "32% taxable" — it's fully covered by NRB and tax-free, but eats into the NRB available for the estate.
- Gifting in the wrong order. Large gift first, small gift second — the small gift may end up taxable because the NRB is consumed by the larger early gift. Reversing the order can sometimes help, though specific case-by-case analysis is needed.
- Ignoring the "gift with reservation of benefit" trap. Giving away your house but continuing to live in it is treated as still in your estate — the 7-year clock doesn't even start. The same applies to other gifts where you retain benefit (e.g., transferring shares but continuing to receive dividends).
- Not keeping records. Executors need to identify gifts going back 7 years. Without records, HMRC can assume the worst. Keep a "gifts ledger" with date, recipient, value, and witness.
Combining with other exemptions
Lifetime gifts are most powerful when stacked with always-exempt allowances:
- Annual exemption: £3,000/year, can carry forward one unused year. So in a typical year you can gift £6,000 (current + last year) fully exempt.
- Small gifts: £250 per person per year, separate from the annual exemption. No limit on number of recipients.
- Wedding gifts: £5,000 from parent, £2,500 grandparent, £1,000 anyone else.
- Gifts out of normal income: see our dedicated page. Potentially the most powerful exemption for higher earners.
Sources
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