The 7-Year Rule: Gifts, PETs, and Taper Relief
Gifts made during a person's lifetime are not automatically free of Inheritance Tax. Most gifts to individuals are "potentially exempt transfers" — PETs for short. A PET becomes fully exempt if the giver lives for seven years after making it. If the giver dies sooner, the gift is added back into the estate, and taper relief may reduce the tax on it. This is the 7-year rule, and it is the rule behind most lifetime Inheritance Tax planning.
In short
No tax is due on a gift if the giver lives for 7 years after giving it. If the giver dies within 7 years, the gift counts towards the estate, uses the £325,000 nil-rate band first, and taper relief cuts the tax rate on the gift — 32% at 3–4 years, 24% at 4–5 years, 16% at 5–6 years, 8% at 6–7 years, and 0% at 7 years or more. Taper relief only applies where total gifts in the 7 years exceed £325,000, and it cuts the tax, not the value of the gift.
Potentially exempt transfers
A gift to an individual — a child, a grandchild, a friend — is normally a potentially exempt transfer. No tax is due at the time of the gift, and no tax is due at all if the giver lives for seven years afterwards. The exception is gifts into most trusts, which are charged differently and are covered in the trusts guide. Gifts to a spouse, civil partner or charity are exempt outright and never enter the 7-year count.
What happens if the giver dies within 7 years
If the giver dies within seven years of making a gift, the gift is added back when the estate is valued. It uses the nil-rate band first. Only the part of the total gifts above £325,000 is actually taxed — and the rate on that part depends on how long the giver survived after making the gift. People who receive gifts might have to pay the tax, but only if the giver gave away more than £325,000 and died within 7 years; usually the estate pays.
Taper relief: the rates
| Years between gift and death | Tax rate on the gift |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more years | 0% |
Two points are commonly misunderstood. First, taper relief only applies if the total value of gifts made in the 7 years before death is over the £325,000 tax-free threshold. Second, it reduces the tax charged on the gift, not the value of the gift itself. A £100,000 gift made five years before death still counts as £100,000 towards the estate — only the rate on the taxable part is cut, to 16%.
Gifts with reservation
If something is given away but the giver still benefits from it, it counts towards the value of the estate. The classic case is giving away a home but still living there. Giving away a home before death is normally free of tax if the giver moves out and lives for another 7 years; continuing to live there requires paying rent at the going rate and a share of the bills, otherwise it is a gift with reservation and the home stays in the estate.
Keep records
The person dealing with the estate needs to work out what gifts were given in the 7 years before death — what was given, to whom, and its value when given. Keeping a simple list as gifts are made saves the executor a difficult search later. The planning guide covers the gifts that never enter the 7-year count at all: the annual exemption, small gifts, wedding gifts, and regular gifts from surplus income.
Sources: GOV.UK, How Inheritance Tax works: thresholds, rules and allowances.