Inheritance Tax & The 7-Year Rule: How to Gift Assets Wisely (UK)
Are you thinking about helping your children or grandchildren financially—perhaps with a house deposit or university fees—but you're worried about how it might affect Inheritance Tax? You're not alone. Many of our clients at Westwood Estate Planning want to be generous now, while they're here to see their family benefit, but they're unsure about the rules and don't want to create problems down the line.
The '7-year rule' is one of those phrases that gets mentioned a lot, often causing more confusion than clarity. In this article, we'll break down exactly how it works, what gifts are affected, and—most importantly—how you can make gifts wisely to reduce your potential Inheritance Tax bill while supporting the people you care about.
By the end, you'll have a clear understanding of this essential rule and practical steps you can take today.
The Basics: What is the 7-Year Rule and Why Does it Exist?
Let's start with the fundamentals. Inheritance Tax (IHT) is a tax on your estate—your property, money, and possessions—when you pass away. The standard Nil-Rate Band (the amount you can pass on tax-free) has been frozen at £325,000 per person since 2009, and this freeze is set to continue until at least 2030. Additionally, the Residence Nil-Rate Band can add an extra £175,000 if you leave your main home to direct descendants. Any value above your available allowances is generally taxed at 40%.
The 7-year rule comes into play when you make gifts during your lifetime. In simple terms: if you make a gift and live for another seven years, that gift is usually completely exempt from Inheritance Tax. However, if you pass away within seven years of making the gift, it might still be counted as part of your estate for IHT purposes.
This rule exists to prevent people from simply giving away all their assets shortly before death to avoid paying Inheritance Tax. It encourages genuine, early planning rather than last-minute manoeuvres.
Understanding Potentially Exempt Transfers (PETs) and Taper Relief
Most gifts you make to individuals are known as 'Potentially Exempt Transfers,' or PETs. The seven-year clock starts ticking from the date you make the gift. Survive those seven years, and the gift becomes fully exempt from IHT.
But what happens if you don't survive the full seven years? This is where 'taper relief' comes in—though there's an important catch that many people miss.
Taper relief only applies if your total taxable gifts exceed your £325,000 nil-rate band. If your gifts are within that threshold, there's no tax to pay anyway, so taper relief won't be relevant.
However, if you've made gifts totalling more than £325,000 and you pass away within seven years, taper relief reduces the tax payable on a sliding scale:
Death within 3 years of the gift: The full 40% IHT rate applies to the amount above your allowances
Death between 3 and 4 years: Tax reduced to 32% (80% of the full rate)
Death between 4 and 5 years: Tax reduced to 24% (60% of the full rate)
Death between 5 and 6 years: Tax reduced to 16% (40% of the full rate)
Death between 6 and 7 years: Tax reduced to 8% (20% of the full rate)
Death after 7 years: No tax—the gift is fully exempt
This sliding scale is designed to encourage earlier planning. The sooner you make gifts, the better your chances of them being completely tax-free.
A Critical Point Many People Miss
Here's something that often catches families by surprise: if Inheritance Tax becomes due on a gift you made, it is usually the person who received the gift who must pay the tax, not your estate.
Your estate pays IHT on the assets you still owned when you died, but gifts have their own tax liability that falls on the recipient. This is why clear communication with your family and careful planning are so important—you don't want your children receiving an unexpected tax bill when they thought they'd received a tax-free gift.
A Practical Example: How the 7-Year Rule Works
Let's look at a real-world scenario to make this clearer:
Margaret's Story: Margaret has an estate worth £800,000. In January 2023, she gives £400,000 to her daughter to help her buy a house. Sadly, Margaret passes away in March 2027, four and a half years after making the gift.
Here's what happens:
The £400,000 gift was a PET, so it didn't fall outside the estate immediately
Margaret died within seven years, so it's brought back into the IHT calculation
Her nil-rate band of £325,000 is used first against the gift
This leaves £75,000 of the gift above the threshold (£400,000 - £325,000)
Because Margaret died between 4 and 5 years after the gift, taper relief applies at 60% of the tax
The tax due is: £75,000 × 40% = £30,000, reduced to £30,000 × 60% = £18,000
Margaret's daughter would be liable to pay this £18,000 tax bill
If Margaret had survived just over seven years, there would have been no tax at all on the £400,000 gift.
Making Gifts Wisely: Exemptions You Can Use Now
While the 7-year rule primarily applies to larger gifts, there are several valuable exemptions you can use immediately, every year, without needing to worry about any waiting period:
Annual Exemption (£3,000)
You can give away up to £3,000 each tax year completely free of IHT. If you didn't use last year's allowance, you can carry it forward for one year only, allowing you to give £6,000 in a single tax year. However, you cannot accumulate multiple years of unused allowances—it's use it or lose it after one year.
Small Gift Exemption (£250)
You can give away up to £250 to as many different people as you like in a tax year. The only condition is that you cannot combine this with any other exemption for the same person in the same tax year. This is perfect for birthday or Christmas gifts to grandchildren, nieces, nephews, or friends.
Gifts from Surplus Income (Unlimited)
This is a powerful, yet often overlooked, exemption. If you can demonstrate that you're making regular gifts from your surplus income after tax—meaning you have enough income left to maintain your usual standard of living without dipping into your capital—these gifts can be immediately IHT-exempt, regardless of their size, with no 7-year waiting period.
Example: John receives a pension of £60,000 per year. After all his living expenses (£35,000), he has £25,000 surplus income. He makes regular monthly payments of £2,000 (£24,000 per year) to help his daughter with childcare costs. Because these come from surplus income and don't affect his lifestyle, they're immediately exempt from IHT.
This exemption is particularly useful for contributing to grandchildren's school fees or making regular payments to family members. To use this effectively, careful record-keeping of your income and expenditure is essential to prove to HMRC. This exemption is typically claimed by your executors after your death using form , so keep detailed records.
Wedding Gifts
You can give tax-free gifts for weddings or civil partnerships: £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else. These gifts must be made shortly before or on the day of the wedding and are conditional on the ceremony taking place.
Gifts to Spouses/Civil Partners (Unlimited)
Any gifts between spouses or civil partners who are both long-term UK residents are completely exempt from IHT. From April 2025, the rules changed from being domicile-based to residence-based, but the principle remains the same—you can give unlimited amounts to your spouse or civil partner tax-free.
The strategy: Using these exemptions strategically and consistently can significantly reduce the value of your estate over time, helping to protect your legacy without any waiting period.
Important Warnings: Gifts with Reservation of Benefit
While understanding the 7-year rule and exemptions is crucial, there's one major pitfall you need to avoid: 'gifts with reservation of benefit.'
If you give away an asset but continue to benefit from it, the gift will not qualify for the 7-year rule and will still be counted as part of your estate for IHT purposes.
The classic example: You gift your house to your children but continue to live there rent-free. HMRC will treat this as if you still own the house, and it will remain in your estate for IHT purposes. The gift simply won't work.
To avoid this, you must either:
Pay market rent to the new owners (and they must declare this as income), or
Move out completely
This is a common mistake that can unravel years of planning, so it's essential to get proper advice before making any gifts of property or assets you want to continue using.
Beyond Tax: The Real Goal of Estate Planning
The real goal isn't just to avoid tax; it's to ensure your wishes are met, your family is provided for, and the process is as smooth and stress-free as possible when the time comes.
Making mistakes with gifts or IHT planning can lead to unexpected tax bills and complications for your loved ones—particularly if recipients end up with an Inheritance Tax liability they weren't expecting. There are other strategies too, such as using trusts or life insurance policies, that can play a vital role in protecting your wealth for future generations.
That's where expert guidance comes in—helping you navigate the rules, avoid common pitfalls, and create a robust plan tailored to your specific circumstances.
Key Takeaways: What You Need to Remember
✓ The 7-year rule: Gifts become IHT-free if you survive seven years after making them
✓ Taper relief: Only applies if your gifts exceed £325,000, providing reduced tax rates between years 3-7
✓ The recipient pays: Tax on failed gifts is usually the recipient's responsibility, not your estate's
✓ Use annual exemptions: £3,000 per year, £250 small gifts, and surplus income exemptions are immediately tax-free
✓ Avoid reservation of benefit: Don't gift assets you want to continue using without proper arrangements
✓ Keep records: Especially for surplus income gifts—documentation is essential
How Westwood Estate Planning Can Help
At Westwood Estate Planning, we guide you through the process of setting up your estate planning with straightforward advice and genuine support. We focus on making sure you understand what you're putting in place and why it matters, so you have real confidence that your future is protected and your family won't face unnecessary burden or unexpected tax bills.
We help you create a plan that's right for your specific situation—whether that's making the most of gift exemptions, setting up trusts, or ensuring any larger gifts are structured correctly.
Ready to Get Your Estate Planning Sorted?
If you're considering making gifts or want to have a proper conversation about what Inheritance Tax planning actually means for you and your family, we're here to help.
Book a free, no-obligation 15-minute chat with us. It's an opportunity to ask your questions, get plain answers, and understand how to make your estate planning work for you and your loved ones—without the jargon or pressure.
