Gifts and inheritance tax: the seven-year rule explained

Most gifts you make to people are free of inheritance tax if you live for seven years after making them. If you die within seven years, the gift is added back to your estate and may be taxed. Some gifts are exempt straight away, including £3,000 a year, small gifts of up to £250 per person, wedding gifts and regular gifts out of surplus income. This guide explains how the seven-year rule works, how taper relief can reduce the tax on a gift, which gifts are exempt, and what executors need to find out about gifts the person made before they died.

How the seven-year rule works

A gift to another person, such as money to a child or a share of a property to a grandchild, is called a potentially exempt transfer (PET). There is no tax to pay when you make it. If you live for seven years after the gift, it falls out of your estate completely. If you die within seven years, the gift becomes chargeable. It is added to your estate for inheritance tax purposes and uses up your nil rate band (£325,000) first, in the order the gifts were made. Anything left of the nil rate band is then set against the rest of your estate. Gifts into most trusts work differently. They are chargeable lifetime transfers, so tax at 20% can be due straight away on the amount over the nil rate band. See the section on gifts into trust below.

Taper relief

Taper relief reduces the tax on a gift if you die between three and seven years after making it. It only applies where the gifts made in the seven years before death total more than the nil rate band, because otherwise there is no tax on the gifts to reduce.

Source: GOV.UK, Inheritance Tax: gifts.

Worked example

Margaret gives her son £431,000 towards a house. She has made no other gifts, and she uses her annual exemption for that tax year and the year before (£3,000 each), so the gift counts as £425,000. She dies four and a half years later.

• The first £325,000 of the gift is covered by her nil rate band.
• The remaining £100,000 is taxable. Because she died between four and five years after the gift, it is taxed at 24% rather than 40%.
• Tax on the gift is £24,000. Her son, as the person who received the gift, is normally the one who pays it.
• Her nil rate band has been used up by the gift, so the rest of her estate has no nil rate band left. Her executors may still be able to claim the residence nil rate band, and a transferred nil rate band if she was widowed.

Taper relief reduces the tax on the gift itself. It does not reduce the value of the gift that is set against the nil rate band, which is why large gifts can increase the tax on the rest of the estate. Gifts into trust made in the seven years before another gift can also affect how much nil rate band is left for it. This means gifts made up to 14 years before death can matter. If you have made gifts into trust, please speak to us.

Gifts that are exempt straight away

These gifts are free of inheritance tax whenever you make them, even if you die within seven years:

• Annual exemption: £3,000 of gifts in each tax year. If you do not use it, you can carry it forward for one tax year only.
• Small gifts: up to £250 per person each tax year, to as many people as you like, as long as you have not used another exemption on the same person.
• Wedding and civil partnership gifts: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else. These can be combined with the annual exemption.
• Regular gifts out of surplus income: no set limit, if the gifts are part of a regular pattern, come from your income rather than savings, and leave you enough to keep your usual standard of living. Paying a grandchild's school fees or a regular monthly payment to a child can qualify.
• Gifts to a spouse or civil partner: exempt, as long as you are legally married or in a civil partnership and they meet the UK residence conditions.
• Gifts to charities and political parties: exempt.

So, in answer to "how much can you gift per year?": £3,000 under the annual exemption, plus any number of £250 small gifts to other people, plus wedding gifts and regular gifts from surplus income. Larger gifts are not taxed when made, but fall under the seven-year rule.

Gifts with reservation of benefit

If you give something away but keep using it or benefiting from it, HMRC treats it as still part of your estate when you die, however long ago you made the gift. The most common example is giving your home to your children but carrying on living there without paying them a full market rent. Giving away a painting that stays on your wall works the same way. These rules can be complicated, and there can be income tax consequences too, so please take advice before giving away an asset you still use.

Gifts into trust

A gift into most trusts, such as a discretionary trust, is a chargeable lifetime transfer. If the gift, together with other chargeable transfers in the previous seven years, is more than the nil rate band, tax at 20% is due on the excess when the gift is made, and it must be reported on form IHT100a. If you die within seven years, more tax can become due, with credit for the tax already paid. Our guides to inheritance tax planning with trusts and IHT100 forms explain the rules and the forms in more detail.

Keeping records: what executors need to know

When someone dies, their executors must report gifts made in the seven years before death on the IHT400 (schedule IHT403). It helps everyone if the person who makes the gifts keeps a simple record of:

• the date, value and recipient of each gift
• which exemption, if any, applies
• for gifts out of income, a yearly summary of income, spending and the gifts made, to show they came from surplus income

If you are an executor and there is no record, bank statements for the last seven years are usually the best place to start. Large transfers, payments to family members and property changes are the things to look for.

Frequently asked questions

Can I give my house to my children to avoid inheritance tax?

You can, but if you carry on living in it without paying a full market rent, it is a gift with reservation of benefit and stays in your estate. There may also be capital gains tax for your children when they sell it. Speak to us before making a gift like this.

Who pays the tax on a gift if I die within seven years?

The person who received the gift is normally responsible for any tax on it. If they do not pay, the executors can become liable, which is why it is important to keep records.

Does the £3,000 annual exemption apply per person?

The £3,000 is per giver, not per recipient. A married couple can each give £3,000 a year, so £6,000 between them, or £12,000 if neither used their exemption the year before.

Does taper relief reduce the value of the gift?

No. It reduces the rate of tax on the gift, and only on the part above the nil rate band.

How Roche Legal can help

We help people plan gifts to children and grandchildren and help executors work out which past gifts need to be reported. If you are thinking about a large gift, or dealing with an estate where gifts were made, contact the Roche Legal team for clear, practical advice.

Further reading

• Reducing your inheritance tax
• Do your inheritance tax plans consider lifetime transfers?
• Inheritance tax thresholds, rules and allowances for 2026
• What happens after you've completed your IHT400 form?
• Inheritance tax calculator

This guide is general information, not legal or tax advice. Rules can change, so please speak to us about your situation.

Sources used

• GOV.UK, How Inheritance Tax works: thresholds, rules and allowances: gifts