The Inheritance Tax 7-year rule — taper relief, PETs and how it really works
Quick answer: Most lifetime gifts are 'potentially exempt transfers' (PETs).
Most lifetime gifts are 'potentially exempt transfers' (PETs). If you survive 7 years from the date of the gift, it falls completely outside your estate for Inheritance Tax. Die within 7 years and the gift is added back — but taper relief can reduce the tax charge from year 3 onwards.
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Primary source: https://www.gov.uk/inheritance-tax/gifts
How the 7 years are counted
The clock starts on the date of the gift, not the tax year. A gift made on 1 June 2026 becomes fully exempt on 1 June 2033 — assuming no reservation of benefit.
Multiple gifts are stacked in chronological order. Each new gift first uses up the donor's annual £3,000 exemption (and any £3,000 carried forward from the previous year), then sits as a PET.
The 7-year cumulation runs from each gift's own date. If you make a £100,000 gift in 2026 and another in 2028, the 2026 gift becomes exempt in 2033 but the 2028 gift not until 2035.
Taper relief: what it actually does
Taper relief is often misunderstood. It reduces the IHT charged on the gift itself — not on the rest of the estate. The gift first uses up the nil-rate band, and only any tax on the excess is tapered.
Worked example: £450,000 gift in year 5 before death, no other gifts. The first £325,000 is within the nil-rate band; the £125,000 excess is taxed at 40% = £50,000. Taper relief at 60% (5–6 years) reduces this to £20,000.
If the gift is within the nil-rate band, taper relief does nothing — the gift uses up the band on death, which can push the rest of the estate into higher tax. This is a common reason a 'small' gift surprises executors.
Gifts with reservation and the GROB rule
Under FA 1986 s102, a gift with reservation of benefit (GROB) is treated as if it had never left the estate. The classic example is gifting your home to your children but continuing to live there without paying full market rent.
Pre-Owned Asset Tax (POAT) under FA 2004 Sch 15 catches some arrangements that try to escape the GROB rules — for example contributing cash to a property that someone else buys for you to live in.
These rules make 'gift the house, keep living there' a poor IHT plan. Better routes include downsizing and gifting the cash difference, or using a discretionary trust with professional advice.
Common questions
- Does the 7-year rule apply to gifts to trusts?
- No — gifts into most trusts are 'chargeable lifetime transfers' (CLTs), not PETs. They use up the nil-rate band immediately and can attract a 20% lifetime IHT charge on the excess. The 7-year clock matters for stacking with other CLTs but the rules are different.
- Are wedding gifts caught by the 7-year rule?
- No — wedding gifts are separately exempt up to £5,000 (parent), £2,500 (grandparent / couple to each other) or £1,000 (anyone else), provided they're made before the ceremony. Anything above the exempt amount is treated as a PET.
- What's the 14-year rule I keep hearing about?
- The '14-year rule' is shorthand for the way chargeable lifetime transfers in the 7 years before a PET can use up the nil-rate band available to that PET when the donor dies within 7 years. It's not a separate exemption period — it's just an interaction between CLTs and PETs.