What is the 7-year inheritance tax rule?

Last verified: 16 October 2025 (England & Wales)

When Mr Jones died, leaving a £500,000 estate, nearly £70,000 of inheritance tax was due. Had he given £200,000 to his children as a gift three years earlier, thestate could have saved thousands under the 7-year rule.

Quick-read summary

When you make a gift during your lifetime, it may be classed as a Potentially Exempt Transfer (PET) for inheritance tax purposes.

• If you survive seven years after making the gift, it usually falls out of your estate completely – no inheritance tax (IHT) to pay.
• If you die within seven years, the gift may still reduce your estate’s tax bill thanks to taper relief, which gradually lowers the IHT rate from year three onwards.
• HMRC does not officially call it the “7-year rule” – it is simply a shorthand that professionals and the public use to describe the rules around PETs.

At Fern Wills & LPAs, we often emphasise that it is really a “3-year rule”: once you have survived three years, the tax savings can already be significant, and they only improve the longer you live.

Practical checklist

• Identify what counts as a gift: money, assets, property, or forgiving a debt.
• Check if it’s a PET or exempt gift:
  • Up to £3,000 each year (annual exemption).
  • Small gifts of up to £250 per person.
  • Wedding gifts (£1,000 to anyone, £2,500 to a grandchild, £5,000 to a child).
• Work out if taper relief applies:
  • Only if the gift is over the nil-rate band (£325,000 in 2025).
  • Only if tax is actually due (taper reduces tax, not the value of the gift).
• Keep clear records: date, amount, recipient.
• Watch out for “gifts with reservation”: for example, giving away your home but still living there rent-free usually does not qualify.

The taper relief table

If you die within seven years of making a PET, tax may be due. Taper relief reduces the tax rate (not the size of the gift) after three years:

What to consider

• Nil-rate band interaction: Gifts use up your £325,000 nil-rate band first. If gifts and estate together exceed this, inheritance tax becomes due.
• Spouse and civil partner exemptions: Gifts between spouses are always free of inheritance tax.
• Timing matters: Multiple gifts can overlap, creating a “stacking” effect within the seven-year window.
• Executors’ role: Executors must report gifts in the seven years before death (form IHT403). Poor records can create delays.
• Your strategy: Planned gifting – recorded, structured, and using exemptions – can reduce your estate’s exposure to IHT significantly.

Gifts Out of Surplus Income

Gifts made regularly from genuine surplus income (rather than capital) can qualify for a full inheritance-tax exemption under section 21 of the Inheritance Tax Act 1984.

To stay within the exemption, keep clear records showing your income, regular outgoings, and the pattern of gifts. A simple way to do this is by using the Surplus Income Schedule within the Life & Legacy Series Finance Log.

Executors should retain this schedule to evidence that gifts were affordable and part of a regular pattern.

How this works in real life

The three-year advantage

Mr Davis gifts £200,000 to his daughter in January 2022. He dies in February 2025 (just over three years later).

• Gift value: £200,000.
• Above his £325,000 nil-rate band, so taxable.
• Instead of 40%, taper relief reduces the rate to 32%.
• Tax due: £64,000 instead of £80,000 – a £16,000 saving.

The five-year gift

Mrs Cole gifts £200,000 to her son. She passed away five years later.

• Tax rate is now 16%.
• Tax due: £32,000 – a £48,000 saving compared to the full rate.

 Surviving the full seven years, Mr and Mrs Hart gift £200,000 jointly to their children. Both survive more than seven years.

• No tax due at all.
• The gift has fallen out of their estate.

Multiple gifts overlap. In 2018, Mr Khan gave £150,000 to his daughter. In 2021, he gave £200,000 to his son. He died in 2024.

• The 2018 gift is six years old – tax rate 8%.
• The 2021 gift is three years old – tax rate 32%.
• Executors must calculate both separately, then apply them to the estate’s nil-rate band.

The gift with reservation

Mrs Lewis “gifts” her home to her son in 2020, but continues living there rent-free. She dies in 2027.HMRC treats this as if she never gave it away. The full property value is included in her estate for IHT purposes.

However, if Mrs Lewis had paid a full market rent to her son under a written tenancy agreement, the property could have qualified as a valid gift without reservation. Always record such rent arrangements in writing and update them annually.

Does every gift fall under the 7-year rule?

No. Small gifts, wedding gifts, and the annual £3,000 exemption are outside it.

What if I die after six years and eleven months?

The 7-year rule is exact – six years and eleven months still falls within taper relief, not exemption.

Do I need to inform HMRC about PETs immediately?

No. They are only reported if you die within seven years. Executors use form IHT403 to declare them.

What records should I keep?

A simple log: date, recipient, amount, purpose. Keep bank statements, letters, or notes.

What happens if I give away my house but continue to live in it?

This is usually a “gift with reservation”. It stays in your estate unless you pay a market rent.

Can I give away unlimited gifts tax-free if I live for seven years?

Yes – but careful planning is needed if gifts exceed the nil-rate band within seven years.

Technical Notes 

• PETs vs CLTs: PET = gift to an individual, exempt if you survive seven years. CLT = usually a gift into trust, chargeable on entry against your nil-rate band.
• Legislation: Inheritance Tax Act 1984, s.3A (PETs), s.7 (chargeable transfers).
• HMRC manuals: IHTM04057 (taper relief), IHTM14501 (PETs).
• Taper relief starts at three years: It reduces the tax payable, not the value of the gift.

What about the 14-year rule?

The “14-year rule” is not an official HMRC rule. It is a shorthand used by professionals to describe how earlier Chargeable Lifetime Transfers (CLTs) into trusts can affect later PETs if death occurs within seven years. In practice, this only matters if:

• You have already made large transfers into trusts, and
• You then make PETs within seven years, and
• You die within that period.

For most families, this rule is irrelevant. But it is helpful to know the term so you can ask the right questions. If you have ever set up a discretionary or complex trust, it is advisable to seek specialist advice.

14-Year Rule (for complex estates)

If you have made Chargeable Lifetime Transfers (CLTS) into a trust within seven years before a Potentially Exempt Transfer (PET), those earlier transfers can extend the review window.

This means inheritance-tax calculations can sometimes look back up to 14 years.

It affects only estates involving significant trust activity, but it is helpful to know when reviewing older trust arrangements.

Next steps

If you are considering making lifetime gifts, the rules can seem daunting. But with the right advice, gifts can be a powerful way to reduce inheritance tax and support your loved ones sooner.

At Fern Wills & LPAs, we will help you:

• Understand which gifts are exempt.
• Record gifts properly so executors have no difficulties later.
• Plan gifting strategies that work with your Will.

Contact us if you would like to explore this as part of your estate planning.

You can also purchase our Lifetime Gift Record Checklist and Surplus Income Schedule from the Life & Legacy Series to help you track gifts clearly and accurately.