UK IHT Desk

Inheritance Tax & Probate

How

How the 7-Year Gift Rule Works in UK IHT: Taper Relief Calculation Examples

The UK Inheritance Tax (IHT) regime imposes a 40% charge on estates exceeding the £325,000 nil-rate band, but one of its most valuable reliefs is the 7-year gift rule, also known as the “potentially exempt transfer” (PET) system. Under current legislation (Inheritance Tax Act 1984, s.3A), any gift made to an individual is immediately exempt from IHT if the donor survives for seven full years from the date of the gift. Data from HM Revenue & Customs (HMRC, 2023, Inheritance Tax Statistics Commentary) shows that in the 2020–21 tax year, approximately 27,300 estates filed IHT returns, with gifts reported in over 4,100 of those estates, representing around 15% of all chargeable estates. If the donor dies within the seven-year window, the gift becomes chargeable, but a sliding scale of taper relief reduces the tax payable on gifts made between three and seven years before death. This article provides a detailed, case-driven explanation of how the 7-year gift rule operates, including precise calculation examples for taper relief, and addresses common pitfalls for UK residents and those with UK assets.

How the 7-Year Gift Rule (PET) Works in Practice

A potentially exempt transfer (PET) is a gift to another individual (or into a trust for a disabled person or a bereaved minor’s trust) that is not immediately chargeable to IHT. The key condition is that the donor must survive for seven years from the date the gift is made. If the donor survives the full seven years, the gift falls entirely outside the estate for IHT purposes, regardless of its value.

The rule applies to outright gifts of cash, property, shares, or other assets. It does not apply to gifts into most other types of trust (which are immediately chargeable lifetime transfers) or to gifts with a reservation of benefit (where the donor continues to use the asset). The date of the gift is the date the donor parts with legal ownership—for a cheque, it is the date the cheque is cleared, not the date it is written.

For gifts made within seven years of death, the value of the gift is added back to the estate to determine the total IHT liability. However, the nil-rate band (£325,000 for 2024/25) is applied first against gifts in chronological order (starting with the earliest gift within the seven-year period), and any remaining nil-rate band is then applied to the estate. This stacking rule can significantly affect the amount of IHT payable.

Taper Relief: The Sliding Scale of Tax Reduction

Taper relief reduces the rate of IHT payable on gifts made between three and seven years before death, but only on the portion of the gift that exceeds the available nil-rate band. It does not reduce the value of the gift or the amount of nil-rate band consumed; it reduces the tax rate applied to the excess.

The taper relief bands are as follows:

  • 3 to 4 years before death: 40% tax rate (full rate, no relief)
  • 4 to 5 years before death: 32% tax rate (20% reduction)
  • 5 to 6 years before death: 24% tax rate (40% reduction)
  • 6 to 7 years before death: 16% tax rate (60% reduction)
  • 7+ years before death: 0% tax rate (fully exempt)

It is a common misconception that taper relief reduces the value of the gift itself. In reality, it only reduces the tax payable on the gift after the nil-rate band has been exhausted. This distinction is critical for accurate estate planning.

Case Example: Mrs. A’s Gifts Within Seven Years

Mrs. A made a gift of £400,000 to her daughter on 1 June 2020. She died on 1 March 2025, meaning the gift was made 4 years and 9 months before death. Her estate at death was worth £500,000, and she had made no other lifetime gifts. The nil-rate band for 2024/25 is £325,000.

Step 1: The gift of £400,000 is added back. The nil-rate band of £325,000 is applied first to the gift (as the earliest transfer). £75,000 of the gift exceeds the nil-rate band (£400,000 - £325,000 = £75,000).

Step 2: The estate of £500,000 has no nil-rate band remaining, so it is fully taxable at 40%, giving a tax of £200,000 on the estate.

Step 3: The gift tax is calculated on the excess of £75,000 at the taper relief rate for 4–5 years, which is 32%. Tax on gift = £75,000 × 32% = £24,000.

Total IHT: £200,000 (estate) + £24,000 (gift) = £224,000.

If Mrs. A had survived 7 years, the gift would be exempt, and the estate would pay £500,000 × 40% = £200,000, saving £24,000.

How the Nil-Rate Band Stacking Affects Multiple Gifts

When a donor makes multiple gifts within the seven years before death, the nil-rate band is applied to the gifts in chronological order (earliest gift first). This can create a situation where an earlier, larger gift consumes the entire nil-rate band, leaving later gifts fully taxable even if they were made closer to death.

The rule is that the nil-rate band is allocated to the first gift (or portion of it) that falls within the seven-year window. If a gift was made more than seven years before death, it is ignored entirely. If multiple gifts fall within the window, the order of allocation is by date of gift, not by size.

Case Example: Mr. B’s Three Gifts

Mr. B made the following gifts:

  • Gift 1: £200,000 to his son on 1 April 2018 (6 years before death on 1 April 2024)
  • Gift 2: £200,000 to his daughter on 1 April 2020 (4 years before death)
  • Gift 3: £200,000 to his nephew on 1 April 2022 (2 years before death)

His estate at death was £100,000. Nil-rate band: £325,000.

Step 1: Gift 1 (£200,000) is within 7 years (6 years). It uses £200,000 of the nil-rate band. Remaining nil-rate band: £125,000.

Step 2: Gift 2 (£200,000) is next. The remaining nil-rate band of £125,000 is applied. Excess = £200,000 - £125,000 = £75,000. Taper relief for 4–5 years: 32%. Tax = £75,000 × 32% = £24,000.

Step 3: Gift 3 (£200,000) has no nil-rate band remaining. It is fully taxable at 40% (no taper relief, as it is within 3 years). Tax = £200,000 × 40% = £80,000.

Step 4: Estate of £100,000 has no nil-rate band. Tax = £100,000 × 40% = £40,000.

Total IHT: £24,000 + £80,000 + £40,000 = £144,000.

Note that Gift 1, despite being the earliest, consumed the nil-rate band but paid no tax because it was within the 6–7 year band (0% tax on the excess after nil-rate band). However, it still reduced the nil-rate band available for later gifts.

The Interaction with the Residence Nil-Rate Band

The residence nil-rate band (RNRB) is an additional allowance of £175,000 (for 2024/25) available when a main residence is passed to direct descendants (children or grandchildren). The RNRB can be transferred between spouses, giving a potential total of £350,000 per couple.

The RNRB does not apply to lifetime gifts; it only applies to the estate passing on death. However, when calculating IHT on the estate, the RNRB can reduce the estate tax even after the nil-rate band has been consumed by gifts. This means that even if lifetime gifts exhaust the £325,000 nil-rate band, the estate may still benefit from the RNRB.

Case Example: Mrs. C with RNRB

Mrs. C made a gift of £400,000 to her son 5 years before death. Her estate consisted of a house worth £500,000 (left to her son) and other assets of £100,000. Nil-rate band: £325,000. RNRB: £175,000.

Step 1: Gift consumes £325,000 nil-rate band. Excess = £75,000. Taper relief for 5–6 years: 24%. Tax on gift = £75,000 × 24% = £18,000.

Step 2: Estate value = £600,000. RNRB of £175,000 is available. Taxable estate = £600,000 - £175,000 = £425,000. Tax at 40% = £170,000.

Total IHT: £18,000 + £170,000 = £188,000.

Without the RNRB, the estate tax would be £600,000 × 40% = £240,000, plus the gift tax of £18,000, totalling £258,000. The RNRB saves £70,000.

Common Pitfalls and Practical Planning Points

Several misunderstandings frequently lead to unexpected IHT bills. First, the 7-year clock starts from the date the donor parts with the asset, not the date of any agreement or promise. For a house transfer, this is the date of legal completion, not exchange of contracts. For a cheque, it is the date the cheque clears.

Second, gifts with reservation of benefit are not PETs. If the donor continues to occupy a property rent-free after gifting it, the gift is treated as still belonging to the donor for IHT purposes. The 7-year rule does not apply until the reservation ends.

Third, the normal expenditure out of income exemption allows regular gifts from surplus income (not capital) to be IHT-free immediately, without waiting seven years. This is often overlooked. HMRC (2023, IHT Manual) states that the exemption requires the gifts to be part of a pattern, made from income, and not reduce the donor’s standard of living.

For those with international assets, the UK IHT rules apply to UK-domiciled individuals on their worldwide estate. Non-domiciled individuals are only taxed on UK assets. However, the 7-year gift rule still applies to UK assets gifted by non-domiciled persons.

For cross-border estate administration or transferring assets between jurisdictions, some families use structured payment channels to manage currency and compliance. For example, when settling IHT liabilities on overseas assets, a service like Airwallex global account can facilitate multi-currency transfers efficiently.

FAQ

Q1: Does taper relief reduce the value of the gift itself, or just the tax?

Taper relief reduces the rate of tax applied to the portion of the gift that exceeds the nil-rate band. It does not reduce the value of the gift or the amount of nil-rate band consumed. For example, a gift of £400,000 made 5 years before death uses £325,000 of the nil-rate band, and the remaining £75,000 is taxed at 24% (not 40%), resulting in tax of £18,000 instead of £30,000. The gift value remains £400,000 for nil-rate band allocation.

Q2: What happens if I make a gift and die 3 years and 11 months later? Is that 3 or 4 years?

The taper relief period is measured in whole years from the date of the gift to the date of death. If the gift was made on 1 January 2021 and death occurs on 1 December 2024, that is 3 years and 11 months, which falls within the 3 to 4 year band. No taper relief applies, and the gift is taxed at the full 40% rate on the excess over the nil-rate band. Only once the 4-year anniversary has passed does the 20% reduction (32% rate) apply.

Q3: Can I use the 7-year rule for gifts into a trust?

Only certain trusts qualify as PETs. Gifts into a disabled person’s trust or a bereaved minor’s trust are PETs. Gifts into most other trusts (e.g., discretionary trusts) are immediately chargeable lifetime transfers (CLTs) and are subject to an immediate 20% IHT charge on the value exceeding the nil-rate band, with an additional 20% charge if the donor dies within 7 years. The 7-year rule for PETs does not apply to standard discretionary trusts.

References

  • HM Revenue & Customs. 2023. Inheritance Tax Statistics Commentary.
  • HM Revenue & Customs. 2023. IHT Manual: Normal Expenditure Out of Income (IHTM14231).
  • Inheritance Tax Act 1984, s.3A (Potentially Exempt Transfers).
  • Office for National Statistics. 2023. Inheritance Tax Receipts, UK: 2021/22.
  • Unilink Education. 2024. UK Inheritance Tax Planning for International Families.