The "seven-year rule" is the cornerstone of inheritance tax planning in the UK. It's the rule that says gifts you make at least seven years before you die fall outside your estate for IHT purposes.
But there's more nuance than the headline. This article works through how the rule actually applies, what counts as a gift, and what happens when you don't quite make the seven years.
What the seven-year rule actually says
When you give something away, HMRC categorises it as one of three things:
- An exempt gift - immediately outside the estate (e.g. gifts between spouses, charitable gifts, gifts within the annual £3,000 exemption).
- A Potentially Exempt Transfer (PET) - outside the estate if you survive the gift by seven years.
- A Chargeable Lifetime Transfer (CLT) - taxable immediately at 20% (e.g. gifts to most types of trust), with extra tax if you don't survive seven years.
This article focuses on PETs - the everyday gifts most people make.
How taper relief works
If you die within seven years of a PET, the gift is dragged back into your estate for IHT. But the rate of tax on the gift reduces with time. This is "taper relief":
| Years survived after gift | Tax rate on the gift |
|---|---|
| 0-3 years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| 7+ years | 0% (gift fully out of estate) |
Important catch: taper relief only kicks in if the gift exceeds the available NRB at death. It reduces the tax on the gift, not the gift's contribution to using up the NRB. We'll work an example below.
Worked example: a £400,000 gift
Sarah gives her son £400,000 in 2022. She dies in 2026, exactly 4 years later. Her estate at death is worth £700,000. She has the standard £325,000 NRB and £175,000 RNRB available (the home goes to her son).
Step-by-step:
- The £400,000 PET is added back to the estate.
- The NRB (£325,000) is applied to the gift first (oldest gifts use NRB first). That leaves £75,000 of the gift above the NRB.
- Tax on £75,000 at 40% = £30,000. Sarah survived 4 years, so taper relief reduces this by 24% (the 4-5 year band): £30,000 × 76% = £22,800 payable on the gift.
- The remaining estate of £700,000 has no NRB left (used up by the gift) but does have the £175,000 RNRB. So £700,000 - £175,000 = £525,000 taxable at 40% = £210,000.
- Total IHT: £232,800.
If Sarah had survived the gift by 7 years, the £400,000 would be entirely outside the estate, the full NRB would be available against the £700,000 estate, and the IHT bill would have been much lower.
The lesson: time matters enormously.
What actually counts as a gift
It's broader than people think. Gifts include:
- Cash transfers.
- Property transfers (including transferring your house into a child's name).
- Forgiving a loan.
- Selling something for less than market value (the discount is treated as a gift).
- Giving up a benefit you were entitled to.
Gifts do not include:
- Spending on your own consumption (a holiday for yourself).
- Paying living costs for someone you have a legal duty to support (a minor child).
- Gifts caught by other rules (see below).
Gifts with reservation of benefit
The biggest catch in the seven-year rule is the gift with reservation of benefit (GROB) trap. If you "give" something away but continue to enjoy it, HMRC treats it as still being in your estate - regardless of how many years pass.
Classic example: parents transfer the family home to their children but carry on living in it rent-free. The seven-year clock doesn't start running. The whole house is still in the parents' estate when they die.
Workaround: pay full market rent. Then the gift is real and the clock starts.
Annual exemption layered on top
Every tax year you can give away £3,000 completely outside the seven-year rule. Unused annual exemption can be carried forward for one tax year - so a couple who haven't used theirs can together gift £12,000 in one go (£3,000 each plus £3,000 each carried forward).
There's also the small gifts exemption - £250 per recipient per tax year, separate from the annual exemption.
Gifts out of normal expenditure
This one's underused. Regular gifts from your surplus income (not capital) that don't reduce your standard of living can be entirely outside the estate, with no seven-year wait.
Conditions:
- The gifts must form a regular pattern (monthly, annually, "on each grandchild's birthday").
- They must come from income, not capital.
- After the gifts, you must still maintain your normal standard of living.
For high earners, this is one of the most powerful IHT tools. Document the regular pattern carefully (a letter of intent works), because the executor will need to evidence it.
How HMRC checks
When the executor files the IHT400 (the full IHT return), they declare any gifts the deceased made in the previous seven years. The executor's job is to find them - bank statements going back seven years, gift records, anything the family knows.
For complex estates, we recommend you seek assistance from a Trusted Hands Advisor or your own legal advice.
Practical ways to use the rule
- Start early. The seven-year clock waits for no-one.
- Use the annual exemption every year - it's small but compounds.
- Consider regular gifts from surplus income.
- For larger gifts, document the date and amount and consider taking out gift insurance (a 7-year decreasing-term policy that pays out if you die within seven years).
- Don't combine gifts with continued benefit - it nullifies the rule.
- Don't give away assets you might need - the gift is irrevocable.
Trusts and the seven-year rule
Gifts to most types of trust are Chargeable Lifetime Transfers, taxed at 20% above the NRB at the time of the gift, with extra tax if you don't survive seven years. They also carry periodic charges (every 10 years) and exit charges when funds leave the trust. Trust planning is a specialist area.
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Frequently asked questions
What happens if I die 6 years and 11 months after a gift?
You're in the 6-7 year taper band. Tax on the gift (above the NRB) is reduced by 80%. So a 40% rate becomes 8%.
Can I give my house to my children?
Yes, but if you keep living there rent-free, it's a gift with reservation of benefit and stays in your estate. Pay them full market rent, or move out, to make the gift real.
Do I need to tell HMRC when I make a gift?
You don't need to report the gift at the time. Your executor declares all qualifying gifts within the previous seven years on the IHT400 after death. Keep records - dates, amounts, recipients - so it's easy for them.
Are wedding gifts subject to the seven-year rule?
No - up to certain limits. Parents can each give £5,000, grandparents £2,500, and others £1,000, exempt regardless of when you die.
What about Christmas and birthday gifts?
Reasonable seasonal gifts are usually covered by the £250 small gifts exemption per recipient per year, or by the £3,000 annual exemption.
For more on inheritance tax, see our IHT explainer.
A will is where IHT planning begins. Start yours online - the Trusted Hands engine flags estates likely to attract IHT and prompts you to record gifts and trust references for your executor.
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