The 7 Year Rule on Gifts: Inheritance Tax and Taper Relief Explained
Give something away, survive seven years, and it is outside your estate for Inheritance Tax. Die within seven years and it comes back in.
That's the rule. Everything else is detail — but the detail is where the money is, and two parts of it are almost universally misunderstood: gifts consume your nil-rate band before your estate gets to use it, and taper relief reduces the tax, not the gift.
The rule in one paragraph
A gift to an individual is a potentially exempt transfer. It is "potentially" exempt because exemption depends on something that hasn't happened yet — you surviving seven years. If you do, it's exempt and gone. If you don't, it becomes a failed PET: added back into the reckoning at its value when you gave it, set against your nil-rate band oldest first, and taxed only to the extent it exceeds that band.
Gifts that are exempt whatever happens
These never need the seven years. They are exempt immediately.
| Exemption | Limit | Notes |
|---|---|---|
| Annual exemption | £3,000 per tax year | One year's unused allowance can be carried forward, so £6,000 maximum in a year |
| Small gifts | £250 per recipient per year | All-or-nothing: cannot be used to take £250 off a larger gift, and cannot be combined with the annual exemption for the same person |
| Wedding gift from a parent | £5,000 | Per parent, per marrying child |
| Wedding gift from a grandparent | £2,500 | |
| Wedding gift from anyone else | £1,000 | |
| Gifts to a spouse or civil partner | Unlimited | Provided they are UK domiciled or long-term UK resident |
| Gifts to a UK charity | Unlimited | |
| Gifts to political parties, museums, universities | Unlimited | Conditions apply |
| Normal expenditure out of income | Unlimited | See below |
| Maintenance of family | Reasonable amounts | Ex-spouse, dependent relative, child in education |
The normal expenditure out of income exemption is the most powerful and the least used. A gift is exempt with no seven-year wait at all if it is made from surplus income (not capital), forms part of a regular pattern, and leaves you able to maintain your usual standard of living. Someone with a £60,000 pension who spends £35,000 and gifts £20,000 a year to grandchildren can take that £20,000 a year out of their estate immediately, indefinitely, with no limit.
It is fact-specific and HMRC scrutinises it, so it needs contemporaneous records — a schedule of income, expenditure and gifts, kept as you go. Form IHT403 asks for exactly that breakdown. This exemption is too dependent on individual circumstances for a calculator to compute, which is why we explain it rather than model it.
How gifts eat the nil-rate band first
This is the part that produces unexpected bills.
Failed gifts are set against the nil-rate band in chronological order, oldest first, before the estate gets any of it. So the estate doesn't get a fresh £325,000 — it gets whatever the gifts left behind.
A £300,000 estate with no gifts pays nothing. The same £300,000 estate where £60,000 was gifted four years earlier works out like this:
| Step | Amount |
|---|---|
| Gift | £60,000 |
| Less two years' annual exemptions | −£6,000 |
| Chargeable gift | £54,000 |
| Nil-rate band | £325,000 |
| Band used by the gift | −£54,000 |
| Band left for the estate | £271,000 |
| Estate | £300,000 |
| Taxable | £29,000 |
| Tax at 40% | £11,600 |
The gift itself produced no tax — the band covered it. But by consuming £54,000 of band, it pulled £29,000 of the estate into charge. Giving away £60,000 created an £11,600 tax bill on an estate that would otherwise have paid nothing.
Taper relief — the most misunderstood part
Taper relief reduces the tax on a gift, not the gift's value. It only ever applies where a gift has actually produced tax — which means the gift has to exceed the available nil-rate band. For most gifts, taper relief is irrelevant, because the band absorbs them.
| Years between gift and death | Taper relief | Effective rate on the excess |
|---|---|---|
| Under 3 | 0% | 40% |
| 3 to 4 | 20% | 32% |
| 4 to 5 | 40% | 24% |
| 5 to 6 | 60% | 16% |
| 6 to 7 | 80% | 8% |
| 7 or more | n/a — outside the estate | nil |
So "the gift is six years old so it's 80% tax free" is wrong twice over. The gift's full value still counts against the band. Only the tax on the amount above the band is reduced by 80%.
A full worked example
Someone dies leaving a £400,000 estate, having given a child £500,000 exactly five years earlier. No spouse, no property to descendants.
Step 1 — the gift
| Gift | £500,000 |
| Less annual exemptions (current year + one carried forward) | −£6,000 |
| Chargeable gift | £494,000 |
Step 2 — set it against the band
| Nil-rate band | £325,000 |
| Used by the gift | −£325,000 |
| Band left for the estate | £0 |
| Gift value above the band | £169,000 |
Step 3 — tax on the gift, with taper
| Tax before taper (£169,000 × 40%) | £67,600 |
| Taper relief at 60% (5–6 years) | −£40,560 |
| Tax on the gift | £27,040 |
Step 4 — tax on the estate
| Estate | £400,000 |
| Band available | £0 |
| Tax at 40% | £160,000 |
Total Inheritance Tax: £187,040 — of which £27,040 is owed by the child who received the gift, and £160,000 by the estate.
Note what happened: an effective rate of nearly 47% on a £400,000 estate, because the gift absorbed the entire nil-rate band. Had the person survived another two years, the gift would have dropped out entirely, the full £325,000 band would have been available to the estate, and the total bill would have been £30,000.
Who pays the tax on a gift
The recipient. Not the estate.
This catches families out badly. A child who received £500,000 five years ago, spent it on a house extension and a wedding, can find themselves with a £27,040 bill they had no idea was coming.
If the recipient doesn't pay within twelve months of the end of the month of death, the liability shifts to the executors, who must pay it from the estate. That reduces what the residuary beneficiaries get — so a gift to one child is effectively paid for by the others.
Two practical consequences:
- Tell the recipient. Anyone who has received a substantial gift should know there is a potential liability hanging over it for seven years.
- Consider insuring it. A seven-year decreasing term life policy, written in trust, is the standard solution. It is often surprisingly cheap and it matches the shape of the risk exactly.
Gifts with reservation of benefit
If you give something away but keep the benefit of it, the gift doesn't work for Inheritance Tax. The asset stays in your estate no matter how many years pass.
The classic example: transferring the house to the children while continuing to live in it rent free. The seven-year clock never starts. The house remains fully in the estate, and — because you no longer own it — you may also have lost the residence nil-rate band and created a Capital Gains Tax problem for the children. It is one of the most reliably counterproductive moves in estate planning.
Paying a full market rent can avoid the reservation, but then the rent is taxable income for the children and the arrangement needs to be genuine and documented.
The calculator does not model gifts with reservation of benefit. If any gift falls into this category, treat it as still inside the estate.
Record keeping
Executors have to complete form IHT403 listing gifts in the seven years before death. Reconstructing that from bank statements after someone has died is miserable, and gaps tend to be resolved against the estate.
A simple running list solves it. For each gift: date, recipient, what it was, value, and which exemption you are relying on. For the normal expenditure exemption, add annual income and expenditure figures.
The calculator lets you add each gift with its date and type, applies the annual exemption tax year by tax year, and shows per-gift how much is chargeable, how much band it consumed, and what taper relief it attracts.
Common questions
How does the 7 year rule work for Inheritance Tax?
A gift made more than seven years before death falls completely outside the estate. A gift made within seven years is added back and uses up the nil-rate band, oldest gift first. Only gifts that exceed the available band attract tax, and taper relief reduces that tax once the gift is more than three years old.
How much can I gift tax free each year?
You have a £3,000 annual exemption, and can carry forward one year's unused allowance for a maximum of £6,000 in one year. On top of that you can give £250 to as many different people as you like, make wedding gifts of up to £5,000 as a parent or £2,500 as a grandparent, and make unlimited regular gifts out of surplus income.
Does taper relief reduce the value of the gift?
No — and this is the most common misunderstanding. Taper relief reduces the tax payable on the gift, not the value of the gift itself. The full value still counts against the nil-rate band, so a large gift made six years before death can still push the estate into charge even though the tax on the gift itself is reduced by 80%.
Who pays the Inheritance Tax on a gift?
The person who received the gift is primarily liable, not the estate. If they do not pay within twelve months of the end of the month of death, liability passes to the executors, who must pay it out of the estate — reducing what the other beneficiaries receive.
Do I have to declare gifts made more than 7 years ago?
Generally no, but gifts into trust and gifts with a reservation of benefit can reach back further, and executors are asked about gifts in the seven years before death on form IHT403. Where a gift made within seven years itself followed an earlier chargeable transfer, the earlier transfer can affect the calculation.