The 7-Year Rule and Taper Relief: How Gifts Fall Out of Inheritance Tax

Under the inheritance tax 7 year rule, most gifts you make during your lifetime become completely free of inheritance tax (IHT) if you live for seven years after making them. Die within seven years and the gift is added back into the IHT calculation — but it is set against your £325,000 nil-rate band first, and only the part above that band can be taxed, at up to 40%. Taper relief can cut that tax, but only on gifts big enough to exceed the nil-rate band on their own.

Key points

• A gift to another individual is a potentially exempt transfer (PET): tax-free if you survive seven years, brought back into charge if you do not.
• Gifts within 7 years are set against the nil-rate band in date order, earliest first. Most never produce a tax bill of their own.
• Taper relief reduces the tax, not the value of the gift — and there is no tax to reduce unless cumulative gifts exceed £325,000.
• The person who received a failed gift is normally the one HMRC looks to for the tax, not the estate.
• Inheritance tax is UK-wide: the same rules and rates apply in Scotland, Wales and Northern Ireland.

Potentially exempt transfers: what actually starts the clock

When you give money or assets to another individual (or to certain trusts for disabled people), the transfer is a potentially exempt transfer. Nothing is reported at the time and no tax is due. The gift is simply "potentially" exempt because its final treatment depends on how long you live.

Survive seven years from the date of the gift and it falls out of your estate entirely — the value, and any growth on it, belongs to the recipient for IHT purposes. Die inside seven years and the gift "fails": its value at the date of the gift is added to the running total that your nil-rate band is applied to.

The clock runs from the date the gift is actually made — the day the money leaves your account or legal ownership of the asset passes — not from the tax year, and not from when the recipient spends it.

Gifts that never need the seven years

Several gifts are exempt immediately, so the seven-year clock is irrelevant to them:

• Gifts to a UK-domiciled spouse or civil partner — unlimited and exempt.
• Gifts to UK charities and political parties — exempt.
• The annual exemption of £3,000 per tax year, which can be carried forward one year if unused (so up to £6,000 in one go).
• Small gifts of up to £250 per person per tax year, to as many different people as you like (but not on top of the annual exemption to the same person).
• Wedding or civil partnership gifts — up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
• Normal expenditure out of income — regular gifts made from surplus income that do not reduce your standard of living. This exemption is unlimited in amount but requires evidence of a pattern and of the income it came from.

Exemptions come off first. Only what is left over is a PET that needs the seven years to run.

The trap: gifts with reservation of benefit

If you give something away but carry on enjoying it, the seven-year clock does not start. The classic example is signing a house over to children while continuing to live in it rent-free. HMRC treats it as a gift with reservation of benefit, and the property stays inside your estate at its value on death no matter how many years pass. Paying a full market rent, or genuinely moving out, is what breaks the reservation.

The taper relief table

Taper relief scales down the tax payable on a failed gift according to how long the donor survived. It applies only to lifetime gifts — never to the estate itself.

Read the table carefully. The percentages reduce the tax bill, not the value of the gift. A £100,000 gift made five and a half years before death is still counted at £100,000 against the nil-rate band; taper only affects tax that arises once the band is used up.

Worked example: taper relief doing real work

Priya gives her son £506,000 in June 2021. She had made no other gifts, so she can use her £3,000 annual exemption for that year plus £3,000 carried forward from the previous year.

1. Gift £506,000 − £6,000 of annual exemptions = £500,000 chargeable transfer.
2. Priya dies in October 2026, five years and four months later. The gift has failed.
3. Her £325,000 nil-rate band is applied to the gift first: £500,000 − £325,000 = £175,000 taxable.
4. Tax at the full 40% would be £70,000.
5. Death fell in the 5-to-6 year band, so taper relief is 60%: £70,000 × 40% = £28,000 payable.

That is the same as charging the taxable slice at 16%. Priya's nil-rate band is now fully used, so the rest of her estate is taxed at 40% above any residence nil-rate band or spouse exemption that applies.

Worked example: why most gifts get no taper at all

Tom gives his daughter £200,000 and dies four years later, leaving an estate of £400,000 with no home passing to direct descendants and no transferable band from a spouse.

• The £200,000 gift is covered by the nil-rate band, so no tax arises on the gift and taper relief has nothing to reduce.
• But the gift uses £200,000 of the band, leaving only £125,000 for the estate.
• Estate tax: (£400,000 − £125,000) × 40% = £110,000.
• Had Tom survived seven years: (£400,000 − £325,000) × 40% = £30,000.

The gift failing cost the family £80,000 — exactly 40% of £200,000 — and taper relief made no difference whatsoever. This is the single most misunderstood point about the 7 year rule: taper only helps where a single gift, or a run of gifts, is larger than the available nil-rate band. You can test your own figures with the inheritance tax calculator.

Order matters

Failed gifts are stacked in chronological order and the nil-rate band is applied to the earliest first. So if there are several gifts within seven years, it is the later ones that spill over the band and attract tax — and later gifts are the ones with the least taper relief. Big early gift, small later gifts is a very different outcome from the reverse.

The 14-year shadow

Gifts into most trusts are chargeable lifetime transfers rather than PETs, and they can affect the nil-rate band available to a later PET. Because a chargeable transfer made up to seven years before a failed gift is brought into the cumulation, gifts as far back as 14 years before death can influence the sum. Anyone who has used a trust should have the full gift history reviewed rather than assuming a clean seven-year window.

Who pays the tax on a failed gift

This surprises families. The primary liability for tax on a failed PET falls on the recipient of the gift, not on the estate or the residuary beneficiaries. If your aunt gave you £400,000 and died three years later, HMRC can ask you for the tax on the part above the nil-rate band.

The practical sequence is:

• The executors report lifetime gifts on the inheritance tax account and calculate the tax on each failed gift.
• The recipient is billed. Tax is due six months after the end of the month of death, with interest running after that.
• If the recipient does not pay within 12 months from the end of the month of death, HMRC can recover the tax from the deceased's estate instead — which means other beneficiaries effectively foot the bill.
• Taper relief belongs to the gift, so it reduces what the recipient owes, not the estate's own tax.

Two consequences follow. First, someone who received and spent a large gift can be left with a tax bill and no funds. Second, a will can be silent on this, so the burden can land unevenly across a family. Where the gift was of land or certain business assets that the recipient still owns, paying by instalments may be possible.

Note also that the residence nil-rate band of £175,000 cannot be used against lifetime gifts. It only applies to a qualifying home passing to direct descendants on death, and it tapers away where the estate exceeds £2m.

Records to keep

Executors have to disclose gifts made in the seven years before death, and in practice HMRC often asks for bank statements going further back. If the paperwork does not exist, exemptions get lost and gifts get valued conservatively — against the family.

Keep a simple gift log, updated as you go, showing for each gift:

• the date the gift was made;
• who received it and their relationship to you;
• what was given and its open market value at that date;
• which exemption you are treating it as covered by (annual, small gifts, wedding, normal expenditure out of income) and how much is left as a PET;
• whether you kept any benefit from the asset.

For regular gifts out of income, the evidence needs to be stronger: a year-by-year record of income received, normal living costs, and the gifts made, showing the gifts came from surplus income rather than capital. A short annual note with the figures, kept with the will, is worth far more than a reconstruction attempted years later.

Executors report gifts on form IHT403, which accompanies the main account. The GOV.UK guidance on gifts and inheritance tax sets out the current reporting requirements.

Things that can change the answer

The nil-rate band has been frozen at £325,000 for many years and is currently set to stay frozen. Separately, unused pension funds are due to be brought within the scope of inheritance tax, which changes how much of the nil-rate band is left for lifetime gifts. Business and agricultural property reliefs have also been reformed, so gifts of trading businesses or farmland need to be looked at under the current relief limits rather than older guidance.

What to do next

Work out where your estate actually sits before worrying about taper percentages. Run your property, savings, investments and any transferable nil-rate band through the inheritance tax calculator to see whether there is a liability at all, then add any gifts made in the last seven years to see how much of the £325,000 band they would absorb. If the total sits comfortably inside the available bands, the 7 year rule costs your family nothing. If it does not, the date and order of past gifts becomes the detail that matters most — and that is exactly the information your executors will need.