Gifts and inheritance tax: the seven-year rule

Inheritance tax is a tax on the estate of someone who has died: their property, money and possessions¹. Everyone has a nil-rate band of £325,000, and anything above that is normally taxed at 40%². But the tax does not only look at what you own when you die. It also looks back at what you gave away while you were alive. Any property or money given away in the seven years before death counts towards the valuation of the estate².

This is the seven-year rule, and it is the single most important thing to understand about lifetime gifts. A large gift to a person is not taxed when it is made. Instead it becomes a potentially exempt transfer, or PET: if the giver survives seven years after making the gift, no inheritance tax is due on it at all³. If the giver dies within those seven years, the gift is brought back into the inheritance tax calculation, where it may use up part of the £325,000 allowance before the rest of the estate is counted³.

The seven-year rule: gifts can count towards your estate

The starting point is simple: gifts you make more than seven years before your death do not form part of your estate, regardless of their value⁷. Gifts made within seven years do. The value of any money or property given away during the seven years before death is included in the estate's value, subject to certain exemptions⁸. So a gift made three years before death is still in the frame, while one made eight years before is not, even if it was worth hundreds of thousands of pounds.

The rule applies to gifts to people. Most gifts to individuals made more than seven years before death are tax-free, provided they were made to people rather than to trusts or businesses⁹. Gifts into a lifetime trust work differently: if you die within seven years of placing assets in trust, they may be subject to inheritance tax¹⁰. The treatment of trusts is covered in how trusts are taxed.

Two conditions matter in practice. First, the gift must be outright: the giver must genuinely no longer own or benefit from what was given. Second, the clock starts on the date the gift is completed, not the date it was discussed or promised. A gift of a home, for example, is classed as a potentially exempt transfer, meaning inheritance tax may be charged if the giver dies within seven years of making the gift; if they live at least seven years, no tax is due and the £325,000 allowance is unaffected¹¹.

The seven-year rule matters most to estates near or above the threshold. Inheritance tax currently affects a relatively small proportion of estates, but more families could be drawn into the tax in the coming years, as thresholds remain frozen and unused pension pots are due to become part of many estates from April 2027¹². For a fuller picture of the thresholds and who pays, see inheritance tax: thresholds, rates and who pays.

How gifts made within seven years are taxed

When someone dies, their personal representatives must add up the estate and also account for gifts made in the seven years before death. The official method is to deduct the value of any gifts made within seven years of the death from the basic threshold first; if the gifts exceed the basic threshold, there will be inheritance tax to pay on those gifts¹³. In other words, lifetime gifts are counted ahead of the estate itself when the allowance is used up.

This ordering has a practical consequence. A gift does not create a tax bill on its own if the total of the gifts, plus the estate, stays within the £325,000 allowance. A £100,000 gift made two years before death, to someone whose estate is worth £150,000, uses up part of the allowance but leaves the rest for the estate, and no tax is due. The same gift made by someone whose estate alone already exceeds the threshold will produce a tax bill on the gift.

Under the seven-year rule, large gifts, known as potentially exempt transfers, only become tax-free if the giver survives seven years after making them¹⁴. If the giver dies within that window, the gift is taxed on a sliding scale from 40% down to 8% depending on the timing¹⁴. That sliding scale is taper relief, and it is set out in the next section.

The value used is the value of the gift when it was made, not its value at death. For a house given away four years before death that has since risen in price, the inheritance tax calculation uses the value at the date of the gift¹¹. Where the estate includes a home left to direct descendants, a separate additional allowance of £175,000 can apply, and a couple can potentially pass on up to £1m entirely tax-free¹⁵. The residence nil-rate band is explained in its own guide.

Taper relief: 32% for gifts made 3 to 4 years before death

Taper relief reduces the tax on a gift according to how long the giver survived after making it. It only ever reduces tax that is actually due: if the gift and estate together fall within the nil-rate band, there is no tax for taper to reduce. The effective rates, as set out in independent guidance, are:

Taper relief only applies to tax that is already due after the nil-rate band is used.

The legislation behind these figures works slightly differently from the way the percentages are usually presented. Section 7 of the Inheritance Tax Act 1984 sets the taper as a fraction of the tax that would otherwise have been charged: 80 per cent where the transfer was made more than three but not more than four years before the death, 60 per cent where it was made more than four but not more than five years before, 40 per cent for more than five but not more than six years, and 20 per cent for more than six but not more than seven years¹⁷. Applied to the 40% headline rate, those fractions produce the 32%, 24%, 16% and 8% figures in the table above.

The same section of the Act also fixes the seven-year lookback in law: chargeable transfers are counted over the period of seven years ending with the date of the transfer being assessed¹⁷. Taper relief therefore rewards survival, but it does nothing for gifts that fall within the allowance in the first place, and nothing at all in the first three years, when the full 40% applies.

Gifts that are always tax-free, including the £3,000 annual exemption

Not every gift needs the seven-year clock. Several categories of gift are exempt the moment they are made, whatever happens to the giver.

The best known is the annual exemption: £3,000 is the total amount you can gift tax-free in a tax year³. Gifts of up to £3,000 in each tax year are exempt from inheritance tax⁸. This allowance is per person, so a couple can usually give away £6,000 per year as standard, and potentially £12,000 if neither made substantial gifts the year before⁹.

The carry-forward rule is what makes the £12,000 possible. You can carry forward any unused allowance from the previous tax year, allowing you to give away up to £6,000 tax-free in one year¹⁸. The annual exemption can be backdated by one year only, so a couple could give away £12,000 in a tax year if they gifted nothing the previous year¹⁹. Carry-forward does not stack beyond one year: an allowance unused two years ago is lost.

Other exemptions sit alongside the annual exemption:

• Outright gifts covered by the annual exemption: gifts to any individual of money or listed stocks and shares that fall wholly within the £3,000 allowance are simply left out of the calculation²⁰.
• Regular gifts from income: gifts made regularly from surplus income, where the giver's standard of living is unaffected, are exempt without limit. Keeping bank statements for the seven years before death can help executors establish the pattern, value and affordability of such gifts¹². This is covered in detail in regular gifts from surplus income.
• Gifts on marriage: these are exempt within fixed limits, and are listed in the guide to annual gift limits.
• Small gifts: each person can also receive small gifts outside the main exemption, as set out in the same guide.

The annual exemption is used year by year and never enters the seven-year calculation at all. A £3,000 gift made two months before death is exempt in exactly the same way as one made ten years before. For most people, combining the annual exemption with regular gifts from income is the simplest way to reduce an estate without creating a potential tax bill for the family.

Gifts to a spouse, civil partner or charity

Transfers between spouses or civil partners, whether during lifetime or on death, are exempt from inheritance tax⁵. Anything left to a surviving spouse or civil partner is exempt from inheritance tax¹⁰. This exemption is unlimited in amount: a surviving spouse or civil partner never pays inheritance tax on anything left to them, as long as both partners are domiciled in the UK²¹. The domicile condition matters: the exemption applies where both partners are domiciled in the UK¹⁸.

The exemption does not extend to unmarried couples. Married couples and civil partners can inherit from one another tax-free; this does not apply if you are unmarried¹¹. For cohabiting partners, every gift is a potentially exempt transfer and needs the full seven years to become safe. This is one of the clearest tax differences between marriage and cohabitation, and it is covered further in inheritance tax for married couples and civil partners.

Where the first partner dies without using their allowance, their unused nil-rate band can be transferred to the survivor, assuming the deceased made no taxable gifts to other people during the seven years prior to their death⁵. This is how a couple's combined allowance can reach £650,000, or up to £1,000,000 where the residence nil-rate band also applies¹⁵.

Charity gifts are treated generously in two ways. Assets left to a registered UK charity are exempt from inheritance tax²². Beyond the exemption itself, if a will leaves at least 10% of the net taxed estate to a UK-registered charity, the rate on the remaining estate falls from 40% to 36%³. The charity must be registered for the reduced rate to apply³. Remember A Charity summarises the position: the inheritance tax rate can be reduced, from 40% to 36%, when 10% or more of the net value of the estate is donated to charity².

Gifts with reservation: where the seven-year clock does not start

The seven-year rule has a condition that catches many families out: the gifts must be "without reservation", so the giver cannot continue to benefit from them⁷. A gift with reservation of benefit is a gift in name only. The classic example is giving your house to your children but continuing to live in it rent-free. Because you still benefit from the property, the gift does not start its seven-year clock, and the property is treated as if it were still part of your estate when you die.

The rule has a long reach. It applies to all gifts made on or after 18 March 1986, and there is no seven-year limit as there is for outright gifts²³. That means a gift with reservation made twenty years before death is still caught: no amount of survival makes it exempt while the benefit continues.

In practice, the ways around a reservation are limited and each has consequences:

• Paying a full market rent to the new owner, at a genuinely commercial rate and actually paid, can remove the reservation, though the rent is then income for the recipient.
• Giving the property and moving out entirely removes the benefit, and the seven-year clock starts from that point.
• Shared occupation, where the giver and recipient live together as part of an arrangement, is a grey area that depends on the facts.

The valuation consequences are significant. A home treated as reserved is included in the estate at its full value at death, not its value when the gift was made, and the seven years of taper relief never begin. Where the estate includes a home, the residence nil-rate band may still help, and the government's rules allow the additional band where a person downsizes or ceases to own a home on or after 8 July 2015 and passes on assets of equivalent value to direct descendants²⁴.

Who pays the tax on a gift: the recipient or the estate

When inheritance tax is due on lifetime gifts, the liability falls in a specific order. If the gifts total more than the nil-rate band for inheritance tax, then the tax is due on the gifts themselves and is paid by the people who received the gifts²³. If the gifts total less than the nil-rate band, the tax is paid by the personal representatives out of the estate²³.

Independent guidance puts the same point more directly: if tax is due on gifts made during the last seven years before death, the people who received the gifts must pay the tax in most circumstances²⁵. For a gifted property, the new owner is liable to pay any tax bill¹¹. This is why a large gift can become a liability for the recipient rather than a windfall: someone who received a house three years before the giver's death may face a tax bill on it, at the tapered rate, while owning an asset they may not be able to sell quickly.

The general position for beneficiaries is more forgiving. You do not usually owe any tax on an inheritance at the time you inherit it, and the personal representative, an executor or administrator, usually pays any inheritance tax due before giving you the inheritance²⁶. But there are cases where a beneficiary can be pursued directly, and HMRC's guidance names three of them: the person who died gave you a gift in the seven years before they died; your inheritance is put into a trust and the trust does not or cannot pay; or the personal representative could not or did not pay before you got your inheritance²⁶.

For the person making gifts, the message is that a gift is not a clean break until seven years have passed. For the recipient, it is worth knowing that a gift received within seven years of the giver's death can carry a tax liability attached to it.

Pensions and gifts: what changes for unused pension pots

For deaths before 6 April 2027, unused pension funds generally sit outside the inheritance tax calculation. That is due to change. The government will bring most unused pension funds and death benefits into scope of inheritance tax from 6 April 2027⁶. From that date, unused pension funds and death benefits payable from a pension will be brought into a person's estate for inheritance tax purposes²⁷.

The change was announced at Autumn Budget 2024⁶ and confirmed in subsequent policy documents and consultations. From 6 April 2027, personal representatives will be liable to report and pay any inheritance tax due on unused pension funds or death benefits⁶. The consultation response confirms that personal representatives will be liable for reporting and payment of inheritance tax due on unused pension funds and death benefits²⁸.

Several details shape how this will work in practice:

• Death in service benefits are excluded. All death in service benefits payable from a registered pension scheme will be excluded from the value of an individual's estate for inheritance tax purposes from 6 April 2027⁶.
• Withholding funds. Beneficiaries will only be able to access 50% of the deceased's pension death benefits, which may be subject to inheritance tax, for up to 15 months after the date of death, where personal representatives direct pension scheme administrators to withhold funds²⁹.
• The maximum charge. Pension scheme administrators would likely make payments on account of the maximum possible amount of inheritance tax, 40% of the value of any unused funds²⁸.
• Spouses remain exempt. If the chosen survivor was a spouse or civil partner, the usual inheritance tax exemption would apply²⁸.

The interaction with gifting is worth noting. From 6 April 2027, any unspent pensions will count towards the value of the estate when inheritance tax is calculated²¹. A person who has been giving money away under the seven-year rule may find that an untouched pension pot pushes the estate back over the threshold, bringing gifts made within seven years back into the tax calculation. The House of Lords Economic Affairs Committee has recommended extending the inheritance tax payment deadline for these measures from 6 to 12 months, recognising the added complexity³⁰. More detail is in the guide to pensions.

Records, deadlines and getting help

Good records are what make the seven-year rule workable. Executors must account for gifts made in the seven years before death, and HMRC can investigate estates where gifts are not properly reported; inheritance tax mistakes in reporting gifts are among the triggers for an HMRC investigation¹⁴. Penalties may apply if valuations are not accurate³¹.

What to keep, and for how long:

• Bank statements covering the seven years before death, which help executors establish the pattern, value and affordability of gifts, particularly regular gifts from income¹².
• Dated evidence of each substantial gift: transfer confirmations, cheques, valuations of property or shares at the date of the gift, and any letters that record the gift.
• Evidence of exempt gifts: records showing use of the annual exemption and of gifts from surplus income.

The deadlines after a death run in a fixed order. If the estate owes inheritance tax, you must report its value within one year using form IHT400³². You must pay inheritance tax by the end of the sixth month after the person dies to avoid paying interest³². For example, if the person died in January, you must pay inheritance tax by 31 July³³. Interest is charged from the first day of the seventh month after the month in which the person died²⁰. You must pay any inheritance tax and interest that is due before you can get a grant of representation²⁰.

Before sending form IHT400, you need to apply for an inheritance tax payment reference number at least 3 weeks before you plan to send the form²⁰. Payments are made to the HMRC Inheritance Tax account, and where a cheque is paid at a bank or building society branch, the name of the deceased and the inheritance tax payment reference number must be written on the back³⁴. In Northern Ireland, the reporting rules for deaths on or after 1 January 2022 work through the same forms: where inheritance tax is due or full details are needed, HMRC uses form IHT400³⁵.

Where tax is due on gifts, the recipients usually pay it, and the deadline is the same end of the sixth month after death²⁵. In some cases inheritance tax can be paid in yearly instalments: the first instalment is due at the end of the sixth month after the death, with payments then due every year on that date, and interest applies to later instalments paid late³⁶. Where money is tied up in the estate, it is possible to apply for a grant on credit, telling HMRC the maximum amount that can be paid towards the inheritance tax before the grant is issued³³.

Free, impartial help is available. In Scotland, mygov.scot sets out inheritance tax support and who to contact¹. Citizens Advice covers dealing with an estate after a death, including when no inheritance tax is due but forms may still be needed³⁷. Age UK explains probate and the process of valuing and administering an estate³¹. For the tax position of gifts while you are alive, the guides to annual gift limits, gifting assets and Capital Gains Tax and the wider personal tax guide cover the related rules.