What Is the Seven Year Rule for Inheritance Tax

Introduction

Inheritance Tax (IHT) is charged on the value of a person’s estate when they die. However, you can often reduce the tax your estate pays by giving away money or assets during your lifetime.

Gifts can be entirely free of Inheritance Tax if you survive long enough after making them. The seven year rule sets out how long that period must be. Understanding it allows you to plan gifts more effectively and pass on wealth to your family in a tax efficient way.

How the seven year rule works

The seven year rule applies to potentially exempt transfers (PETs). These are gifts you make to individuals, such as children, that could become exempt from Inheritance Tax if you live for seven years after giving them.

If you survive for seven years from the date of the gift, no Inheritance Tax is payable on that gift, regardless of its size.

If you die within seven years, the value of the gift is added back into your estate and may be subject to tax, depending on how long ago the gift was made.

Example

John gives his daughter £100,000 in January 2020.

If he lives until January 2027, the gift is fully exempt.

If he dies before that, the gift may still be taxable but could qualify for taper relief, which reduces the tax payable based on how long he lived after making the gift.

Gifts that the seven year rule covers

The rule applies to any gifts that exceed your annual allowances. Common examples include:

Cash gifts to family members or friends above £3,000 per year.

Transfers of property or shares at less than market value.

Forgiving a loan owed to you.

It does not apply to:

Gifts to your spouse or civil partner, which are always tax free.

Gifts to registered charities.

Regular gifts made from surplus income, provided they do not affect your standard of living.

The nil rate band and the order of gifts

Each person has an Inheritance Tax nil rate band of £325,000. This is the amount you can pass on tax free when you die.

If you die within seven years of making gifts, HMRC looks at those gifts in chronological order. The oldest gifts are counted first against your £325,000 allowance.

If the total value of gifts made in the seven years before your death is less than £325,000, no Inheritance Tax is payable.

If the total exceeds £325,000, tax may be due on the amount above that threshold.

Taper relief explained

If you die between three and seven years after making a gift, taper relief can reduce the amount of tax payable. It does not reduce the value of the gift but instead reduces the rate of tax applied.

The taper relief rates are:

Death within 0 3 years: 40 percent (no relief).

Death between 3 4 years: 32 percent.

Death between 4 5 years: 24 percent.

Death between 5 6 years: 16 percent.

Death between 6 7 years: 8 percent.

After 7 years: 0 percent (fully exempt).

Example

Maria gives £500,000 to her son. She dies five years later.

The first £325,000 of the gift is covered by her nil rate band, leaving £175,000 subject to tax.
Normally, the tax would be 40 percent of £175,000 (£70,000).
With taper relief at 24 percent, the tax is reduced to £42,000.

What happens if you give away your home

If you give away your home but continue to live there without paying full market rent, HMRC treats it as a gift with reservation of benefit. This means the seven year rule does not apply, and the property’s value remains part of your estate for Inheritance Tax purposes.

However, if you move out entirely or pay full rent to the new owner, the seven year rule can apply, and the gift may become exempt after seven years.

Tracking and recording gifts

Keeping accurate records is crucial. Executors must know the details of any gifts made within the seven years before death to report them to HMRC.

Records should include:

The date of each gift.

The recipient’s name and relationship.

The value of the gift at the time it was made.

Any relevant correspondence or bank statements.

Without proper documentation, HMRC may estimate values, which could increase the tax due.

How lifetime gifts interact with exemptions

You can give away smaller amounts each year without affecting the seven year rule. These include:

The annual exemption of £3,000 per tax year (which can be carried forward one year).

Small gifts of up to £250 per person.

Wedding gifts (up to £5,000 for a child, £2,500 for a grandchild, or £1,000 for others).

Gifts that fall within these limits are immediately exempt and do not count toward the seven year rule.

Example scenario

David gives his daughter £100,000 in 2018 and his son £250,000 in 2022. He dies in 2026.

The 2018 gift is eight years before his death, so it is fully exempt.

The 2022 gift is within four years of his death, so it is added to his estate.

His total gifts within seven years are £250,000, which is below the £325,000 nil rate band. No Inheritance Tax is due.

If David had given £400,000 to his son, £75,000 would have exceeded the threshold and been taxed at 32 percent (tapered rate). The tax bill would be £24,000.

Common mistakes to avoid

Assuming all gifts are immediately tax free.

Forgetting that taper relief only applies if total gifts exceed the nil rate band.

Continuing to benefit from assets you have given away.

Failing to keep records of gifts.

Ignoring the impact of earlier gifts when planning new ones.

Conclusion

The seven year rule allows you to pass on wealth to family and friends tax free, provided you survive for seven years after making a gift. If you die sooner, taper relief can reduce the amount of tax due, depending on when the gift was made.

By understanding how the rule works and keeping clear records of all gifts, you can plan your estate effectively and help minimise Inheritance Tax for your beneficiaries. For large or complex estates, professional advice from a tax specialist or financial planner can ensure your gifting strategy remains compliant and efficient.